Should I Roll My Traditional 401(k) to a Roth?
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Should I Roll My Traditional 401(k) to a Roth?
When it comes to planning for retirement, having a robust and diversified investment portfolio is crucial. And one key aspect of this strategy is deciding what to do with your retirement accounts, particularly if you have a traditional 401(k) plan. As you approach retirement age, you may be asking yourself, “Should I roll my traditional 401(k) to a Roth?”
A traditional 401(k) is a tax-deferred retirement account, which means that contributions are made pre-tax, reducing your taxable income in the present. On the other hand, a Roth 401(k) account is funded with after-tax dollars, which allows for tax-free withdrawals in retirement.
So, should you consider rolling your traditional 401(k) funds into a Roth account? The answer depends on several factors, including your current tax bracket, future retirement needs, and financial goals.
Firstly, if you expect to be in a higher tax bracket during retirement than you are currently, converting your traditional 401(k) to a Roth may be beneficial. By paying taxes now at your current rate, you can potentially avoid paying higher taxes later when withdrawing from your retirement savings. This can be especially advantageous for individuals in lower income brackets or those with many years left until retirement.
However, if you anticipate being in a lower tax bracket during retirement, converting to a Roth may not make as much sense. In this case, it may be more advantageous to keep your traditional 401(k) as is, taking advantage of the pre-tax contributions and likely paying fewer taxes overall.
Another crucial consideration is your financial goals and cash flow. Converting to a Roth incurs an immediate tax liability since you are essentially transforming pre-tax money into after-tax funds. You will need to pay taxes on the amount converted at your current tax rate. Therefore, you must have sufficient funds outside of your retirement savings to cover this tax bill. If you do not have spare cash available, then a Roth conversion might not be feasible or wise in the short term.
Moreover, if you have significant years left until retirement, your investments in a Roth account benefit from tax-free growth over time, potentially leading to great long-term gains. Conversely, if you are approaching retirement and do not have sufficient time for the investments to grow, converting may not be as beneficial.
Lastly, consider the impact of required minimum distributions (RMDs) on your decision. Traditional 401(k) account holders must begin taking RMDs after reaching age 72 (or 70 ½ if born before July 1, 1949). Roth accounts, however, do not require RMDs during the account owner’s lifetime. If you do not wish to be forced to withdraw a certain amount each year, keeping your funds in a Roth may provide greater flexibility and control over your retirement savings.
Ultimately, determining whether to roll your traditional 401(k) to a Roth account is a complex decision that depends on various factors. Consulting with a financial advisor or retirement planning professional is recommended to help assess your unique circumstances and provide personalized guidance.
In conclusion, while a Roth conversion can present tax advantages and potentially boost long-term growth, it is crucial to carefully evaluate your current and future tax situation, cash flow, and retirement goals before making a decision. By considering these factors and seeking professional advice, you can make an informed choice and stay on track to achieve your retirement dreams.
A few things here Dave…. First, company plans individually have their unique set of features. A retirement plan can offer a Roth contribution feature which is different than an ‘In-Plan Roth Conversion’ feature. It is common to see the first but not the latter. ERISA rules allowing but not mandating both these options to the plan sponsor came at different points in time and since employer plan designs aren’t always updated with regularity they can become what I refer to as ‘outdated’ pretty quickly. Heat from employees can be helpful to drive updating, but know this nice lady is a unicorn and they won’t have many participants like her in the plan. You mention a great strategy of converting the matching which we often advocate. Put on your radar the Secure Act 2.0 that went into effect January, 2023 allows but doesn’t mandate plan sponsors to incorporate a new feature of electing for matching to be done as Traditional OR Roth thus eliminating the need for the IPRC of the matching. It may take a while before we see sponsors begin to adopt it.
Lastly, the retirement asset space is complicated and I advocate the careful use of verbiage in attempt to maybe reduce confusion with the public. At the risk of needing-out here, the term ‘Roll’ in the space generally refers to moving assets from an ERISA work-sponsored retirement plan to an Individual Retirement Account; Roth or Traditional. The technical term for moving assets from Traditional to Roth, either inside a company plan or in IRAs is to ‘Convert’. Kind of important folks are clear on this since one most usually carries no immediate tax implication and the other always does.
This is terrible advice. Anyone with this kind of money at stack should be consulting a professional
2:50 Very important detail in paying the taxes on the converted portion of the traditional IRA conversion. Pay the taxes from other sources other than the roll over itself, so you will get the full amount working for you. If possible, pay the roll over taxes from funds that are not already in the market!!!
She could springboard to baby-step eight by divorcing, living off as much of the child support and alimony as possible and then investing the rest in Mutual Funds
Sorry Dave, every company has their own rules on what can and can't be done in their 401k. 401k rules allow for roths, but plans are not required to offer them.
Can u have 401k and do the Roth IRA at the same time ?
Is there a 501k?
What good is your retirement savings account on IRA or 401k if you money there is loosing its value at the rate of the dollar is doing right now $30 trillion in debt and being dump by other countries like Russia and China or maybe loosing the status as the world reserve currency?
One of the issues with rolling any 401k into an IRA is you lose out on the Rule of 55, which lets you use your current 401k if you leave that employer at age 55 or later. So it provides an option for early retirement without withdrawal penalty. But it you roll 401k -> IRA, you lost that. So you should explore 401k -> 401k rollover.
I’m 35 and have 20 dollars in a savings account
If time is not of the essence, how come she wouldn't wait until the there's a significant market correction or bear market? Decline in pre-conversion dollars = less amount of taxes owed.
With a $2M net worth, it probably doesn't matter and I'm just being cheap for asking.
I invest in dividends for passive income. I love dividends and teaching younger people how to invest.
You can always just stop contributing to the traditional 401k & start investing into the Roth 401k.
I'm actually tired of worrying about stocks. it's driving me nuts these days,I think crypto investment is far better than stock made over $39k in a week….
$2M net worth. Stop being cheap and hire a licensed tax professional. Roth is only good if they are younger (she is at 32), but if they are at a higher tax bracket now, it’s a bad idea (losing the deferred tax benefit now) as they should have a lower tax bracket they can control when they retire, unlike the income they get from an employer.
The calculation is simple. Do you want to pay taxes at your current tax bracket or defer the taxes to the future. You might be in a lower tax bracket when you retire but the federal government might raise the incomes tax rate.
If you have the cash available to pay the taxes you can do an in-plan conversion. My plan is to do incremental in plan conversions each year to maximize my tax bracket thus locking in my current lower tax bracket while I can. I anticipate the tax rates to jump 3% in 3 years when the trump tax cuts expire.
These comments are funny. Dave always say don’t take money advice from broke people.
Dave is probably wrong on this one because ERISA rules are strict. Rolling it into a roth 401k is a taxable conversion, so she needs to roll it over to a rollover IRA, then convert it to a roth IRA herself. A 401k plan is not going to be responsible for doing this and will likely not take the risk of doing this.
Dave, please STOP giving people tax advice unless you get licensed as a tax professional first or just tell people to see their accountants. The IRS is enforcement minded lately and they are not playing around.
Concept: right now she is probably in a 24% federal tax bracket so that's what she will owe federally if she rolls. Let's say in retirement they use 100k of Roth in a year, now their federal tax bracket is 10% because technically they had zero taxable income. Why not leave some in traditional so you can pay taxes later since 10% federal taxes < 24%. You just cut your retirement by a net 14% by rolling everything
Dang. Baby step 7 at 32 at 2M+ net worth? Killing it.
As a Banker I don’t necessarily agree with this advice due to this couple obviously being a very high income household but it’s their life so whatever. If it were me I would probably just keep buying mutual funds and front load a 529.
Why put money into retirement at this point… I think she need to put everything into Roth 401k and IRA. Else she/they are going to pay more taxes when they retired vs the tax rate they have now… Why put away money that you can't touch until you are 65 and you will pay more taxes on… Real estate investment is nice.
i think this is the one but can anyone confirm this is the engineer who called in recently to do her debt free scream where she and her husband are both engineers?
Good grief, I hate financial "advice" such as this. The correct answer is "you need to sit down with a CPA or financial advisor who can provide examples of different scenarios so you can make an informed decision." There is no "one size fits all" here. Personally, unless I had an existing relationship with a CPA / FA that I trusted, I would talk with three or four and see if they gave me the same advice.
Great advice and good to know
What should I do with my 401k if I don’t work for the company any more and I don’t have a job yet???
Idk why she would want to do this…
I don't understand. Why would the caller want to roll over to a ROTH? She's better off letting that money accrue untaxed due to her being a high earner.
So when you roll a 401K into a Roth you have to pay the taxes with outside funds or else you will get double dinged because your technically taking money out?
Horrendous advice. She and her husband are clearly high income earners and Dave is recommending a Roth when traditional is far superior especially for her situation. What a joke
What is Dave saying? How does the $300k in taxes get paid? From "somewhere else"…. huh?
Yes.