Editor's note: This is part five of a seven-part series. It dives more deeply into the first strategy for mitigating a retirement tax bomb, which is to shift retirement savings from pre-tax to after-tax accounts, including Roths and HSAs. If you missed the introductory article, you may find it helpful to start here.
If you're facing a retirement tax bomb, there are three main strategies to defuse it: shifting retirement savings from pre-tax accounts to Roth and HSA accounts, implementing asset location, and executing Roth conversions.
I consider shifting your savings to be the first line of defense, because it's the easiest solution to implement. However, to really get the job done, you'll likely need to implement all three strategies.
There are two flavors to shifting savings, one uses Roth retirement accounts, while the other uses health savings accounts (HSAs).
Shift Retirement Plan Contributions from Pre-Tax to Roth
Perhaps the easiest solution to implement is simply changing your retirement plan contributions from pre-tax to Roth. You'll lose the tax deduction in the current year, and you may have to explain to your accountant why you made the change. However, any company match is tax-deferred, so even if you switch to 100% Roth, the employer match and your investment return means the tax-deferred account will still grow.
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Many of my clients aren't aware they have a Roth option in their 401(k)/403(b), or they mistakenly think they can't contribute to one because of i
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