Answers · 401(k) Rollover

Should I roll over my 401(k) to a Roth IRA?

Only if you can pay the tax with money from outside the account, and only in a year when your tax rate is genuinely lower than the rate you expect later. This is not a normal rollover. Every pre-tax dollar you move to a Roth is taxable income this year. The comparison is that simple and that hard.

This is not a rollover. It is a conversion, and the bill arrives in April.

A normal rollover moves pre-tax money from a 401(k) into a traditional IRA. Nothing is taxed. The money keeps its deferral and the paperwork is boring, which is how it should be.

Moving that same money into a Roth IRA is a different animal. You are volunteering to pay the income tax now so the account is tax free later. The IRS calls it a conversion. Every pre-tax dollar you move counts as ordinary income that year, stacked on top of your salary, your pension and your Social Security. Nobody withholds it unless you ask, so your accountant finds it next spring.

Two parts of your old plan do not work that way. Roth contributions you already made inside the 401(k) move across with no tax at all. After-tax contributions that were not Roth generally come over tax free, and only their growth is taxed. Ask your plan administrator to split your balance into those three buckets before you decide anything. Most people have never seen that number.

To be clear about who is talking. opfinances.com is a licensed insurance agency. We are not a financial advisor and not a fiduciary, so this is general education rather than a recommendation for you. Your own tax professional runs this calculation, not us and not a salesperson.

The whole decision is one comparison, and most of it is guesswork you can narrow.

You are betting that your tax rate today is lower than your tax rate will be when you spend the money. That is the entire case. Everything else is detail.

There is a stretch of years where that bet is unusually good. You have stopped working, so the paycheck is gone. You have not started Social Security. You are not yet 73, so required minimum distributions have not begun. Income is low, the brackets are wide open, and a conversion fills them cheaply. Planners call them the gap years, and they are why this is a question for 62 rather than 75.

The bet is worse in your highest earning year, worse if you are converting into the top of a bracket you will never see again, and worse if the money is earmarked for a charity that would have received it without anyone paying tax at all.

One safety net is gone. Until 2018 you could undo a conversion if the market fell or the math turned out wrong. That reversal no longer exists. Once the money is converted, it is converted.

Paying the tax out of the account itself quietly undoes the whole plan.

Say you convert 100,000 and the combined federal and California tax on it comes to roughly 32,000. Pay it from savings and all 100,000 lands in the Roth and grows tax free. Pay it out of the conversion and only 68,000 lands. You gave up a third of the account to buy the tax treatment on the rest, and it takes years to earn that third back.

It gets worse before 59 and a half. Money you hold back to cover the tax is not converted, it is a distribution, so it generally picks up the ten percent additional federal tax on top of the income tax you already owed.

So the honest test is short. If the cash to pay the tax is not sitting in a regular savings or brokerage account, this probably is not the year.

The costs you did not budget for show up two years later.

A conversion raises your reported income, and a surprising number of things in retirement are priced off your reported income.

Medicare is the big one. Part B and Part D premiums are set from your income two years earlier, so a large conversion at 63 raises what you pay at 65. It lasts a year, and almost nobody mentions it beforehand.

There are others in the same family. More of your Social Security benefit can become taxable. You can lose the zero percent long term capital gains bracket you were quietly sitting in. Retire before 65 and buy coverage on the exchange, and a conversion can cut your premium credit.

None of these make a conversion wrong. They make a big one in a single year expensive in ways the bracket math misses. Run the whole year before you sign.

Convert in slices, and know that the Roth has two separate five year clocks.

For someone with a real balance the useful answer is not yes or no. It is how much this year. Fill the bracket you are already in, stop before you spill into the next one, and do it again next year. Several small conversions across the gap years generally beat one large one, for every reason above.

Then there are the clocks, which trip people up because they sound like one rule and are two. Your first Roth IRA has to have been open five years before the earnings come out tax free. Separately, each conversion has its own five year wait before you can touch that converted amount without the ten percent additional tax, if you are under 59 and a half. Past 59 and a half with a Roth open five years, both are behind you.

The upside is worth stating plainly. A Roth IRA has no required minimum distributions for the owner, so nothing is forced out at 73 and taxed whether you needed it or not. What your heirs inherit generally reaches them free of income tax, which is the opposite of how a pre-tax account treats them.

That is the case for it, and it is a real case. It is just not free, and anyone presenting it as free is skipping the only page that matters.

Related

Do I pay taxes when I roll a 401(k) into a Roth IRA?

Yes, on the pre-tax portion. Moving pre-tax 401(k) money into a Roth IRA is a conversion, and the full amount converted is generally reported as ordinary income for that year. Money that was already Roth inside the 401(k) moves across with no tax. After-tax contributions generally come over tax free while their growth is taxed. Your own tax professional should price it before you sign anything.

Can I move my 401(k) to a Roth IRA without paying taxes?

Not the pre-tax part. There is no version of this where pre-tax money becomes tax free money without the tax being paid somewhere. What you can control is timing and size: convert in a low income year, and convert in slices rather than all at once. If avoiding the tax entirely is the goal, a straight rollover into a traditional IRA keeps the deferral instead.

What is the best age to convert a 401(k) to a Roth IRA?

For most people it is the window after they stop working and before Social Security and required minimum distributions begin, which currently start at 73. Income is at its lowest in those years, so each converted dollar is taxed at the lowest rate you are likely to see. Converting during your peak earning years is usually the most expensive time to do it.

How much tax will I pay to convert 100,000 to a Roth IRA?

It depends entirely on the rest of your income that year, because the conversion stacks on top of it rather than being taxed on its own. A Californian with other income can easily see a combined federal and state cost near a third of the amount converted. The only number that matters is the one your tax professional runs against your actual return.

Is a Roth conversion worth it if I am already retired?

It can be, and retirement is often when the math is best, because income is low before Social Security and required distributions start. The two things that decide it are whether you can pay the tax from outside the account and whether you expect your later tax rate to be higher than the rate you would pay today. It is worth less if the money is destined for charity, which would have avoided the tax anyway.

Where this fits.

This question sits inside a bigger one. 401(k) Rollover walks through the whole decision rather than this one piece of it.

On Point Finances is a licensed insurance agency, not a tax, legal, or investment adviser. This page is general education, not a recommendation, and reading it does not create a client relationship.

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