No one told you your traditional retirement money still has taxes attached.
Traditional IRA and 401(k) money usually went in before income taxes were paid.
When taxable money comes back out, it generally counts as ordinary income.
Your 401(k), IRA and Roth, explained from the beginning
Most of us were taught one retirement rule:
Put money in the 401(k).
Nobody spent much time explaining what happens when it is time to take the money back out.
That is where taxes, Roth conversions, early-withdrawal rules and RMDs suddenly show up.
No one told you...
No one told you Roth money works in the opposite direction.
With traditional retirement money, you usually get the tax break first and pay tax later.
With Roth money, you pay tax first and qualified withdrawals later are tax-free.
No one told you that you can move traditional IRA money into a Roth.
That is called a Roth conversion.
You choose to pay the tax on the converted amount now so that qualified withdrawals from the Roth later can be tax-free.
No one told you that you do not have to convert the entire IRA at once.
You can convert part of it.
Because conversions create taxable income, spreading them over several years can avoid creating one enormous tax year.
No one told you the years right after you stop working may be especially useful for Roth conversions.
Your paycheck may disappear before Social Security and required withdrawals begin.
That can create lower-income years when you control how much traditional retirement money you choose to convert.
No one told you converting too much in one year can backfire.
A Roth conversion adds taxable income.
A very large conversion can push some income into higher tax brackets and may increase other income-based costs.
No one told you paying conversion taxes from outside the IRA can leave more money in the Roth.
If tax withholding comes out of the retirement account itself, less money reaches the Roth.
If you have enough cash elsewhere to cover the tax, more of the converted retirement money stays invested.
No one told you where you live can change the tax on retirement withdrawals.
Traditional retirement withdrawals generally count as taxable income.
States tax that income differently.
No one told you the government eventually makes you start withdrawing from traditional retirement accounts.
For most Gen Xers born in 1960 or later, current law starts these required withdrawals at age 75.
No one told you those withdrawals are called RMDs.
RMD means Required Minimum Distribution.
It is the minimum amount tax rules require you to withdraw from certain retirement accounts each year once the rules apply to you.
No one told you RMDs are not automatically bad.
If you need the money to live on, an RMD is simply retirement savings turning into retirement income.
The downside is loss of control. You may have taxable income even in a year when you would rather leave the money invested.
No one told you that you may be able to use a 401(k) before 59½ without the usual penalty.
If you leave a job during or after the calendar year you turn 55, withdrawals from that employer's qualified plan may qualify for the Rule of 55 exception.
Regular income tax may still apply.
No one told you rolling that 401(k) into an IRA can change that option.
The Rule of 55 exception applies to qualifying employer plans, not IRAs.
That makes automatic rollover timing worth understanding before you move the account.
No one told you you can contribute extra to many workplace retirement plans after 50.
Those extra contributions are called catch-up contributions.
No one told you the catch-up gets even bigger from ages 60 through 63.
Under current rules, workers in those ages may qualify for a larger catch-up limit than the normal age-50+ amount.
No one told you your kids may have only 10 years to empty the IRA they inherit from you.
Many non-spouse beneficiaries must empty an inherited retirement account within 10 years.
Traditional IRA withdrawals are generally taxable to the heir.