Transfer 401k to Roth IRA?

In My Humble Opinion
1

For someone who has a decent chunk of money in a 401k - and is 6-8 years away from retirement - would it make any sense to transfer it all into a Roth IRA?

I think the ship has sailed for this person to reap the benefits of a Roth, but I’m willing to be told I am wrong.
mmm

2

If the 401k was funded with pre-tax money, I believe you will be liable for tax on the contribution amount, if not the whole amount. A rollover to a traditional IRA will avoid any taxes at this time.

3

The 401k was funded with pre-tax dollars.

So this is a no to the Roth move?
mmm

4

If you expect any growth out of the funds going forward, you’ll benefit from any amount you’re able to transfer to a Roth. When looking at how much you can afford to transfer, try paying the taxes out of funds you already have - not out of the 401k funds. (i.e. If you’re transferring $10,000 out of the 401k at a 20% tax rate, you deposit $10,000 into the Roth, and pay $2,000 out of your liquid funds - not deposit $8,000 into the Roth and $2,000 into taxes.)

5

IMHO, it makes a lot of sense to Convert a 401k or Traditional IRA to a Roth. I am doing it and I retired in 2009. I wish I could have done it earlier, but the law changed in 2010.

The never pay taxes on investment growth is a very big deal - especially in retirement.

  1. You have to pay regular income tax on the money you convert.
  2. I am doing partial conversions each year to stay within a reasonable tax bracket.
  3. I will continue to do this until I have to start mandatory 401k distributions (after that, the tax hit might be too much)
  4. I will spend the Roth IRA money last - to maximize tax free investment growth.
  5. I may use Roth IRA funds to ‘top off’ my income from 401k withdrawals if taking more money from the 401k would kick me into a higher tax bracket.

You can also make an annual Roth IRA contribution as long as you meet the income requirements (if too high, check out a ‘backdoor’ Roth contribution)

6

Her is a good PDF about "backdoor’ Roth contributions.

7

Converting to a Roth while you’re working is likely not your best move, although individual circumstances will definitely vary. The problem is simple: your income now is quite likely to be higher than your income in retirement. This means that your marginal tax rate in retirement is going to be lower than your current marginal rate. Converting today means that you’ll pay taxes on the amount that you convert at that higher rate today rather than the lower rate in retirement.

Now, if for some reason you expect to have a higher income in retirement, then converting can make sense. It’s not a very likely scenario but it can come up in years when you make little income due to job loss or a sabbatical, or if you have a substantial 401k or pension built up in previous high-earning years, but you now work in a field with a lower salary.

8

Yes to this. Juggling the tax impact is big part of decision making on a Roth conversion.

Another tax impact is that a reducing your 401k/IRA balance by conversion can reduce your RMD and tax bracket in retirement.