The uncertainty of what the American tax liability will be in the future (much less when we retire) makes it difficult for many of us to plan. One way to mitigate some tax liability is with a conversion of your IRA.

Although the opportunity to spread your tax bill over a two-year period has passed, the Roth conversion itself can still be an option. All the taxes just have to be paid in the year you make the conversion.

With the right strategy, you could possibly have a zero tax liability when converting a traditional IRA to a Roth IRA.

In 2005, the U.S. government created the Tax Increase Prevention and Reconciliation Act (TIPRA). This act allows taxpayers to convert some or all of their traditional IRAs to Roth IRAs, regardless of income. 

Defer taxes whenever possible. For years, tax deferral has been a pillar of financial planning and this is for good reason. In fact, other than tax-deferred retirement accounts and municipal bonds, there have been few alternatives for high-income taxpayers.

Don’t forget, tax strategy and investment strategy go hand in hand. Converting assets and paying taxes at today’s rates is a way to diversify retirement account types. This also helps you to hedge against an uncertain tax environment in the future.

The conversion of today’s reduced account balances can result in a lower tax liability while giving those assets the opportunity to recover value in an income tax-free account. 

Given the depth of the current fiscal crisis and political divide, for many it seems prudent to plan for an increase in income taxes. Rising state and local tax rates also could be inevitable.

In addition, depleted retirement accounts will cause many to postpone retirement, work part-time or tap IRAs and 401(k) plans later than planned. The combined result will be more taxable income (subject to higher rates) than perhaps was originally anticipated. 

Remember, Roth owners are not subject to required minimum distributions, and distributions from the Roth are generally income tax-free. Hence, having the foresight to suggest conversion of assets to a Roth IRA today could make a major difference as you navigate a retirement made more challenging by expected higher tax rates and the need to work longer. 

One strategy for offsetting the tax burden when you convert a traditional IRA to a Roth IRA is to invest in a natural gas limited partnership (LP). There are sometimes qualifications that may need to be met to invest in a natural gas LP. To make this work you will need to have non-qualified funds or other money outside your retirement account.

These investments also offer dividends or maybe less-taxable dividends. A natural gas investment often pays dividends of a modest 8 percent.

The benefit of these investments is that investors participate as part owners and can take advantage of a portion of the tax benefits passed on to owners.

For example, an LP may consist of raising $20 million to drill 25 wells in a proven area, mitigating the risk by diversifying into 25 wells. If all the wells are all drilled and expensed in the first year, then your total investment would have been an expense with little tangible capital left on the books.

In other words, there is no asset except the natural gas, which has not yet been pulled out of the ground. All the drilling equipment is leased, called an Intangible Drilling Cost (IDC).  

With this approach, the general partner investor could actually see a 100 percent tax write off on their investment the first year. The plan would then be to receive royalties from the wells in future years.   

This is where the tax offset takes place. Let’s say you convert $25,000 to a Roth IRA account. You will need to invest $25,000 into the natural gas LP as a non-retirement investment and take your $25,000 IDC against your $25,000 taxable Roth conversion. This now becomes a wash. 

There are two benefits to investing in natural gas. First, investors get a huge tax break in the year they invest. Second, they participate as a partner and benefit from the depletion and depreciation expenses all while receiving monthly royalty checks.  

Choose investments wisely, not only for now but for the future. Consider, also, how taxes are paid on that investment, now and in the future.  

Information in this column is not intended to be specific advice for anyone. You should use the information to help you work with a professional regarding your specific financial goals.