Convert investment account to retirement account?

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Dear Liz,
Can I convert my regular investment account to a retirement account so that an investment made in that account is not taxed? If so, what type of retirement account can I choose?
— Jennifer

Dear Jennifer,
It’s not that easy to dodge a tax bill.

A regular investment account can’t be converted to a retirement account. Conversions and rollovers are allowed only between retirement accounts, and even then, some transfers aren’t allowed. You can’t roll a Roth into a traditional IRA, for example (not that you’d want to), while amounts converted to Roth IRAs from other accounts typically are taxable. The IRS has a rollover chart that explains the details.

What you can do is sell investments in your taxable account and contribute the cash (typically up to certain limits) to a retirement account. You can contribute up to $5,500 to an IRA or a Roth IRA, for example, or $6,500 if you’re 50 or over.

Of course, selling investments can trigger a tax bill now, while withdrawing money from most retirement accounts triggers a tax bill later, since withdrawals are typically taxable. Only Roth IRAs and Roth 401(k)s allow tax-free withdrawals, and neither offers deductions for contributions.

There are no annual contribution limits for annuities, which are often sold as a retirement savings alternative. Annuities offer tax deferral but no deductions for contributions, and at least some portion of withdrawals are subject to income tax.

That means your taxable investment account, which allows you to qualify for low capital gains tax rates on investments you hold more than a year, may well be a more tax-friendly option than some of the alternatives.

Ask the adviser

To ask a question of Liz Weston, go to the “Ask the Experts” page and select “Retirement” as the topic. Read more Retirement Adviser for additional personal finance advice.

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