How Can Retirement Accounts Be Converted to Nontaxable Accounts?

Roth-style accounts offer tax-free distributions.

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You can convert a retirement account to a nontaxable retirement account. Qualified retirement accounts and traditional individual retirement accounts give you deductible contributions and give your investments tax-deferred growth, but you must pay taxes on withdrawals. You can convert these to Roth accounts, giving you nontaxable withdrawals, but you must pay taxes on the conversion.

Employer Accounts

Qualified employer plans include 401(k)s, 403(b)s and 457s. These plans allow employers and workers to contribute pre-tax dollars. Many employers now offer Roth contribution programs that receive after-tax money. A Roth-designated account is separate from the traditional one. If your employer provides a Roth program, you can convert your traditional account. You’ll have to include the converted amount in your taxable income. When you later take money from your Roth-designated account, it’s tax free.

Individual Retirement Accounts

You can convert a traditional IRA to a Roth IRA. The converted amount is taxable income. You can conveniently convert a traditional IRA by asking for a trustee-to-trustee transfer. If the traditional and Roth IRAs have the same custodian, you can request a same-trustee transfer. This allows you to redesignate your traditional IRA without opening a new account. You can also withdraw money from your traditional IRA and deposit it into a Roth account. The Internal Revenue Service wants you to complete this type of rollover within 60 days, or you’ll have to pay taxes and possibly an early withdrawal penalty.

Employer Plan to Roth IRA

If you leave your job, you can roll your employer plan money into a traditional IRA tax free. If you roll it into a Roth IRA, you’ll create taxable income. Your employer will withhold 20 percent of the rollover unless you perform a trustee-to-trustee transfer. You can roll a designated Roth account to a Roth IRA with no tax consequences. Your employer's contributions to your designated Roth plan are tax deductible to your employer; this means that employer contributions are maintained in an account separate from your designated Roth account. You’ll have to include this money in taxable income when you convert it to a Roth IRA. Roth-to-Roth rollovers are one way. You can’t roll a Roth IRA to a designated Roth account, or anywhere else for that matter, except to another Roth IRA.


Roth accounts provide tax-free distributions as long as you've had the account for at least five years and you are age 59 1/2 or older. If you make an early withdrawal from a Roth account, only the portion stemming from investment income is vulnerable to taxes and penalties. Withdrawn Roth contributions are always tax free. If you’re underage, you might qualify for penalty exception, but there’s no relief from the five-year rule. You must start taking distributions from a Roth designated account when you reach age 70 1/2, but you don’t have to withdraw money from a Roth IRA during your lifetime.