Lynn Brenner Lynn Brenner

Brenner answers questions about all aspects of family finance.

I'm 56 years old and work full time. I have a matched 403(b) at work, and own a traditional IRA and a Roth IRA. Is it wise to transfer funds a little at a time from my traditional IRA to my Roth IRA so I won't be taking taxable withdrawals from such a big account in retirement? Saving in my Roth seems sensible since I'll be paying taxes while I have an income, not after I stop working.

Wait until you're older than 591/2 to start making taxable transfers from your traditional IRA to the Roth, to avoid early withdrawal penalties.

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If you can afford it, this strategy can make a lot of sense. "Tax diversification" -- dividing your savings between traditional tax-deferred accounts, a Roth IRA and perhaps a conventional taxable account -- gives you important flexibility in retirement, experts say.

You clearly understand the trade-offs: Contributing to tax-deferred retirement accounts like the 403(b) reduces your current tax bill; but in retirement, your withdrawals from those accounts are taxable -- and after age 701/2, you must take annual withdrawals. By contrast, you pay taxes on the money going into a Roth IRA. But your withdrawals in retirement are tax-free -- and they're optional.

Those differences loom large after you retire. If your entire nest egg is in tax-deferred accounts, your annual withdrawals must be big enough to cover taxes on your distributions in addition to your living expenses; in a falling market, those big withdrawals can quickly deplete your savings. The ability to tap a Roth IRA could help you cover expenses while simultaneously cutting your taxable income. That might lower your tax bracket, which could cut the taxes on your Social Security benefit.

The bottom line Sometimes it makes sense to pay taxes now instead of later.

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