Richie Rich Roths: 6 Ways To Snag One

Gintar Repecka has spent his working life as a pyrotechnician and special-effects coordinator for movies like Iron Man and Armageddon. Now the 61-year-old is making magic with his retirement savings--by making future tax liabilities disappear.

In October he withdrew $250,000 from a pretax traditional IRA and converted it into a Roth IRA, where all future growth and withdrawals are tax-free. The conversion is costing Repecka and his wife just $14,000 in 2015 federal and state income taxes--maybe a tenth of what the Granada Hills, Calif. couple would pay if they drew down that pretax IRA throughout their retirement years. "The beauty is that whatever I siphon off of the Roth won't get added to my taxable income," Repecka says. (Read more on managing your taxes in retirement.)

In a basic Roth conversion you declare the money in a traditional IRA immediately taxable, pay what's due on it (preferably from nonretirement accounts) and then move it into a Roth. The drawback to a conversion is a potentially whopping current tax bill.

But with the help of his Granada Hills tax guru, Doug Thorburn, Repecka executed an "opportunistic" Roth conversion. It worked like this: When he retired last spring, Repecka took both a regular pension from the Motion Picture Industry Pension Plan and a lump sum payout, which he rolled into his pretax IRA. Then the couple sold a ski condo they'd owned and rented out for 12 years, incurring a small loss. More significantly, the sale allowed them to claim 12 years of passive activity losses, which tax rules wouldn't let them claim against ordinary income until they sold. The condo losses soaked up most of the income from converting $250,000 of Repecka's IRA to a Roth.

Complicated? Yep. The simplest way to build a Roth nest egg is to make annual aftertax contributions to a Roth IRA--up to $5,500 per person, or $6,500 for those 50 and older. But for 2016 the amount you can contribute is reduced once your modified adjusted gross income reaches $117,000 for an individual or $184,000 for a couple. At $132,000 for an individual or $194,000 for a couple, you can't contribute at all.

When Roths were created in 1998 there was an income limit on Roth conversions, too, but that came off in 2010. Since then clever tax pros have developed various methods for well-off folks to build up Roth kitties--without a big conversion-tax hit. Repecka's opportunistic conversion, timed to take advantage of a big tax loss, is just one of them. Here are five more.

THE BACKDOOR ROTH IRA

There are no income limits on making annual nondeductible contributions to a traditional IRA. Turns out you can legally make a $5,500 or $6,500 nondeductible contribution to a traditional IRA and then immediately convert the sum to a Roth. (More conservative tax advisors suggest waiting until you get your first statement showing the money was, however briefly, really in the traditional IRA.) Since the contribution was made aftertax, there's no previously untaxed income (or at most a few weeks of earnings) for the IRS to tax. You can make nondeductible IRA contributions for 2015 until Apr. 18. (Be sure to file and retain Form 8606--it establishes your aftertax basis in the IRA.)

One trap to watch out for: Roth IRA conversions are taxed on a pro rata basis. If you have $95,000 of pretax money in a traditional IRA and make a $5,000 aftertax contribution, 95% of whatever you convert to a Roth will be taxable.

Possible way around this trap: If your 401(k) plan allows it, roll your traditional pretax IRA money into your 401(k) before doing a backdoor Roth IRA.

THE FRONT-DOOR ROTH 401(K)

Since 2006, 401(k)s have been allowed to offer a Roth option, and a majority of larger plans now do. For 2016 you can make $18,000 of employee contributions to pretax and Roth 401(k) accounts combined, plus another $6,000 in "catch-up" contributions if you'll be 50 or older by the end of this year.

Fortunately, there are no income limits on who can contribute to a Roth 401(k). Unfortunately, every dollar you use to fund a Roth 401(k) is a dollar less of pretax 401(k) contributions you can make to cut your 2016 income tax bill.

THE BACKDOOR ROTH 401(K)

A better approach for high earners is to make additional aftertax contributions to your 401(k), if you can. For 2016 the maximum that can be put in a 401(k) for any employee is $53,000 ($59,000 if the worker is 50 or older). That total includes basic salary deferral (made in pretax or Roth contributions), the employer match and aftertax contributions that don't go directly into a Roth account. Say you are 55 and socking away the full $24,000 pretax, while your employer kicks in a $6,000 match. Legally you could still contribute another $29,000 aftertax--if your employer permits it.

Here's the back-door move, which again works only if your workplace plan allows it: You can roll your aftertax 401(k) contributions directly into a Roth IRA. Even better, IRS rules allow you to separately roll any earnings on your aftertax money into a traditional IRA, which eliminates any immediate taxes on your rollover. This usually works until you reach age 59 1/2--or the age when your plan allows you access to all of your 401(k) dollars. After that you may have to roll all of your now accessible pretax and aftertax money out of your 401(k) and into separate IRAs to get those aftertax contribution dollars into a Roth IRA tax-free, says Ed Slott, an IRA expert in Rockville Centre, N.Y.

THE MARKET-VOLATILITY PLAY

With the stock market down 11% from its 2015 highs, this one is worth considering. Say you've got $1 million in a traditional IRA and would like to convert at least some of it.

You convert it now into ten separate Roth IRAs, one holding just your Apple stock, one holding your energy stocks, one holding a large-cap mutual fund and so on. Incredibly, you have until Oct. 15 of the following year to undo, or "recharacterize," any Roth IRA conversion. So before October 2017 you look at the market and undo conversions of stocks that have fallen, while keeping conversions of sectors that have rebounded.

"There's no downside. With this crazy market, why not? What do you have to lose?" asks Robert Keebler, a CPA in Green Bay, Wis. whose firm has helped hundreds of clients use this technique.

THE BRACKET FILL

This is a slow and steady technique, often best executed after you've stopped working full-time but before you reach 70, particularly if you're delaying claiming Social Security until 70 to get a bigger benefit.

Say you're in a 15% tax bracket now but expect to be in the 25% tax bracket once your Social Security starts and you must also begin taking taxable required minimum distributions from your traditional IRAs. Convert just enough of your IRA each year to fill up the 15% bracket. For 2016 a couple can have up to $75,300 in taxable income (that's after all deductions and exemptions) before hitting the 25% bracket.