# convert 401k to roth ira



## jdgator (Jan 18, 2017)

There is a conversion tax when you go from a 401k to a Roth IRA. We did the math. My wife and I would have to pay $133,000 in taxes to convert our old 401ks into roth IRAs. Ouch! 

How do people come up with that kind of money? Savings, Cash equity out of house? Loan? 

Or do most folks just leave their money in a traditional IRA?

I am 36, so I have a long time before I start drawing from retirement...


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## Rick Alexander (Jan 18, 2017)

*Best policy*

is to just start investing in roth now IMHO.  When you retire you're ability to draw on that roth as part of your retirement income will ultimately lower your overall gross income (no tax on roth withdrawal) which would lessen your tax burden when you draw from the traditional IRA.  No harm done and the traditional will draw investment income on the extra money you didn't have to pay tax on when you put it in there.  Best of both worlds I believe.  SAVE SAVE SAVE is the key - the longer the better no matter which way you go.  I've got about 70% in traditional and am still putting a portion in there to get my employer match and am slowly building on my ROTH with the rest.  I'm up to 20% of my pay each week put back for retirement now and don't miss it at all.  Been saving at least 10 percent for 28 years.  We haven't had a new car in 35 years and we live very modestly but I WILL be able to retire and enjoy it one day.

Oh and congratulations on the savings so far - to be 36 and have that is a testament to your resolve.  You'll be fine - you have time on your side big time.  Traditional may out perform a ROTH if the stock market does what I think it will for the next 3 years.


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## Meriwether Mike (Jan 18, 2017)

If your 401K has employer matching; continue to take the matching and; leave it alone. The idea is to withdraw your 401K in retirement when you are in a lower tax bracket. If your income allows fully fund a separate Roth up to the limit.


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## jimbo4116 (Jan 18, 2017)

Meriwether Mike said:


> If your 401K has employer matching; continue to take the matching and; leave it alone. The idea is to withdraw your 401K in retirement when you are in a lower tax bracket. If your income allows fully fund a separate Roth up to the limit.



This, plus you lose the earning power of the $133,000.

As far as where do people get that money, you are basically cashing in your 401K and transferring the proceeds after the taxes are paid to the Roth.

If your employer is matching that will out way the taxes due when you begin withdrawing, Probalbly at a lower rate.


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## Uptonongood (Jan 18, 2017)

Rick Alexander said:


> is to just start investing in roth now IMHO.  When you retire you're ability to draw on that roth as part of your retirement income will ultimately lower your overall gross income (no tax on roth withdrawal) which would lessen your tax burden when you draw from the traditional IRA.  No harm done and the traditional will draw investment income on the extra money you didn't have to pay tax on when you put it in there.  Best of both worlds I believe.  SAVE SAVE SAVE is the key - the longer the better no matter which way you go.  I've got about 70% in traditional and am still putting a portion in there to get my employer match and am slowly building on my ROTH with the rest.  I'm up to 20% of my pay each week put back for retirement now and don't miss it at all.  Been saving at least 10 percent for 28 years.  I haven't had a new car in 35 years and we live very modestly but I WILL be able to retire and enjoy it one day.



Excellent advice above.

I missed the opportunity on the Roth IRA option, darn it, but took full advantage of a employer supported 401k.  Started putting money in savings, invested it, lived in the same small house for over 20 years.  If I couldn't pay cash for something, I didn't buy it.  Did NOT borrow against the 401k or the house.  Took advantage of a few low cost hunting options (duck club, hunt cancelations), did not buy a boat and,(here's the big one) I don't have kids.  

Skimp and save, defer excesses, be frugal, live within your means, and a very comfortable retirement can happen. 

Best of luck to you.


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## centerpin fan (Jan 18, 2017)

jdgator said:


> There is a conversion tax when you go from a 401k to a Roth IRA. We did the math. My wife and I would have to pay $133,000 in taxes to convert our old 401ks into roth IRAs. Ouch!



You don't have to convert the entire amount in one year.  Convert ___ % now and the rest later.  Consult your tax advisor.  He can run the numbers for you.

FWIW, in one continuing education class I took (I'm a CPA), the instructor was not a big fan of Roth conversions.  He viewed it as paying tax now for the promise of not being taxed in the future.  I tend to agree.

Full disclosure:  I have a traditional IRA from a previous employer and have not converted to a Roth.


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## jdgator (Jan 18, 2017)

Thanks all for the advice.

I forgot to mention that these are old 401ks from former employers. I contributing to a new 401k to get the match.


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## steeleagle (Jan 19, 2017)

You would have to pay tax ON $133,000 or a tax bill OF $133,000........If you would have to pay a tax bill of $133,000 then your balance in your old 401ks would be somewhere around $836,477 (Using avergage American effective tax rate of 15.9%).......If this is the case and you are 36 then you are pretty much set for life when you retire.  Further, do you have other IRAs?  How did you calculate the "pro rata"?


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## jdgator (Jan 19, 2017)

steeleagle said:


> You would have to pay tax ON $133,000 or a tax bill OF $133,000........If you would have to pay a tax bill of $133,000 then your balance in your old 401ks would be somewhere around $836,477 (Using avergage American effective tax rate of 15.9%).......If this is the case and you are 36 then you are pretty much set for life when you retire.  Further, do you have other IRAs?  How did you calculate the "pro rata"?



Oops! I was estimating this based on my tax bracket, which is 33%. The balance of all of our old accounts is about 400,000. Wife and I already have roth IRAs... Yeah, I will go ahead and pay a CPA to help me with this before tax season begins.


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## skeeter24 (Jan 19, 2017)

jdgator said:


> Oops! I was estimating this based on my tax bracket, which is 33%. The balance of all of our old accounts is about 400,000. Wife and I already have roth IRAs... Yeah, I will go ahead and pay a CPA to help me with this before tax season begins.



Why not just roll the older 401k's into your current one? Assuming you have a good range of investment options, it limits the number of accounts you have to manage and there are no CPA's or tax consequences whatsoever.


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## steeleagle (Jan 20, 2017)

33% is your marginal tax rate...... Not every dollar is taxed at that amount........ Start here
: http://www.schwab.com/public/schwab...ding_iras/ira_calculators/roth_ira_conversion


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## centerpin fan (Jan 20, 2017)

jdgator said:


> Oops! I was estimating this based on my tax bracket, which is 33%.



That's what you should be doing.  If you convert the entire balance, you'll be in the top bracket -- and don't forget state tax, if you're in Georgia.

FWIW, I ran your numbers through the Schwab calculator and got $157,000 due.  (That includes GA tax). A BNA projection will give you a much more accurate estimate.


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## centerpin fan (Jan 20, 2017)

Another thing to consider is we're expecting rates to drop under Trump.  A future conversion would then make more sense.


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## Rick Alexander (Jan 20, 2017)

*Don't you have to*

pay a 10 percent penalty as well if you're below 59 1/2 if you withdraw from the IRA?  Or is that waved if you do a conversion to ROTH?  I don't know - just curious.  I still wouldn't do it either.  If you believe your investments will do very well then the traditional IRA is the better option anyway.  Back in the early 80s I was drawing 25 to 30% annually from my investments for about 4 years.  Those were the days - and thank goodness I had that pretax money in there then.  I'm still smiling from that bump even after everything that's happened since.


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## centerpin fan (Jan 20, 2017)

Rick Alexander said:


> ...pay a 10 percent penalty as well if you're below 59 1/2 if you withdraw from the IRA?



That's true if you're cashing it out, not true if you're rolling over.


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## elfiii (Jan 20, 2017)

In a Roth conversion you would be taxed on any untaxed earnings flowing into the Roth which presumably would be the entire balance of your old 401(k)'s unless you have a tax basis in some of it. Instead, roll them into a traditional IRA because the tax is excessive.

Also, consider requesting your employer to amend their plan to include a Roth 401(k). The beauty of that is you are not limited to the annual $5,500 limit ($6,500 if you are over age 50). You can contribute the full $18,000 to the Roth inside your employer sponsored 401(k) plan.


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## skeeter24 (Jan 20, 2017)

elfiii said:


> Also, consider requesting your employer to amend their plan to include a Roth 401(k). The beauty of that is you are not limited to the annual $5,500 limit ($6,500 if you are over age 50). You can contribute the full $18,000 to the Roth inside your employer sponsored 401(k) plan.



Elfiii......Is there an income limit on being able to contribute to a Roth 401(k) like there is a Roth IRA?


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## elfiii (Jan 21, 2017)

skeeter24 said:


> Elfiii......Is there an income limit on being able to contribute to a Roth 401(k) like there is a Roth IRA?



If you have a Roth IRA the annual limit is $5,500 ($6,500 if you are over 50). The employer sponsored plan Roth 401(k) is subject to the same annual limit ($18,000) as a regular 401(k).


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## tad1 (Jan 21, 2017)

skeeter24 said:


> Elfiii......Is there an income limit on being able to contribute to a Roth 401(k) like there is a Roth IRA?



I do not believe that there is an income limitation on contribution to your company 401k whether that contribution is roth or traditional.


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## elfiii (Jan 21, 2017)

tad1 said:


> I do not believe that there is an income limitation on contribution to your company 401k whether that contribution is roth or traditional.



Yes there is.

https://www.irs.gov/retirement-plan...k-and-profit-sharing-plan-contribution-limits


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## deers2ward (Jan 21, 2017)

I don't see why you wouldn't just roll your old 401(k)s into an IRA. No taxes, no nothing. All your eggs, minus your current gig, in one basket. If when you leave them, roll it in with the rest of them.

Roths are good for people who want to contribute taxed dollars to supplement other retirement plans. It's not something that you should want to fund by liquidating investments with pre-tax dollars.


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## skeeter24 (Jan 21, 2017)

elfiii said:


> If you have a Roth IRA the annual limit is $5,500 ($6,500 if you are over 50). The employer sponsored plan Roth 401(k) is subject to the same annual limit ($18,000) as a regular 401(k).



If you make over $116K single or $183K jointly you are not eligible for full participation and just above that not eligible at all.  Just wondering if those same limits apply to a Roth 401(k)


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## tad1 (Jan 21, 2017)

elfiii said:


> Yes there is.
> 
> https://www.irs.gov/retirement-plan...k-and-profit-sharing-plan-contribution-limits



Elfii, skeeters question I responded to pertained to income limitations on contributing to a 401k plan, Not contribution limits themselves(how much you can put in annually).

The vast majority of folks should be able to contribute to a 401k, with limitations  or exceptions if they are classified as a "Highly Compensated Employee " as according to the IRS.


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## tad1 (Jan 21, 2017)

Getting back to the OP, the question seems to really be whether or not converting from traditional pre tax to Roth (and paying the taxes now) makes sense.  And moving forward should contributions be made traditional or Roth.  
The answer isn't a simple one and many factors come into play.  The biggest factors to consider are present vs. future(when you retire and start taking distributions) tax rates.  You cannot predict the future however.  How will your retirement income and tax bracket compare to today?  For many people, income in retirement could be a good bit lower effectively giving them a lower marginal tax rate.  This scenario would make the traditional IRA more attractive.  
One argument against the Roth is that there are no guarantees that you will not somehow be penalized down the road.  Lets say that although the government claims that Roth distributions will be tax free Uncle Sam could easily reduce or limit your eligibility for other tax credits or benefits etc.  We already see these kind of limits in the current tax code every time we do our taxes.  If your income is too high, you are not eligible for certain credits or your credit amount is reduced.
If you are an aggressive saver and plan to max out all of the tax advantaged accounts you can(IRA, 401k, etc.), then putting money into a Roth allows you to effectively contribute a greater amount.


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