401(K)/403(B)

Rollovers

Is a 401(K) / 403(B) Rollover Right For You?

If you’re wondering whether a 401(k) rollover to a Roth IRA is right for you, keep in mind that it’s not the shell game it used to be. If a trusted friend tells you otherwise, they’re likely referring to an old law from a decade behind us. You can tell them you heard it from us: No longer do you have to take a middle step of converting your 401(k) to a traditional IRA before you can roll it over into a Roth. It’s now a straight shot.

Read on to find out who should consider a 401(k) rollover to a Roth IRA, its requirements and tax implications, and how to get started.

Who Should Consider It

Investments in a Roth IRA are taxed at the time they’re made—and not down the road, when they’re withdrawn— which makes a 401(k) rollover to a Roth IRA ideal for those who expect a rise in their tax rate over the years to come.

Requirements

There are some simple requirements to meet before you can initiate the 401(k) rollover. Most important, you can’t make the transition until you’re no longer on the payroll of the company that administered your 401(k). An exception to that rule is if you’re older than 59 ½ and the plan permits it.

But, wait! Aren’t there income limits on Roth IRAs? You bet, but you don’t have to worry about the caps when doing a 401(k) rollover. There are no income limits for converting to a Roth IRA, and no caps on the amount you can convert.

Tax Implications

Keep in mind that the amount you convert from your 401(k) to your Roth IRA will be taxed. That’s because money invested in a 401(k) hasn’t been taxed yet, while money can’t be invested in a Roth IRA unless it’s already been taxed. Also, the tax consequences can be a rude awakening, so be sure you have an estimate of the cost and a plan for how those taxes will be paid.

Taking your 401(k) balance in the form of a check from your employer is ill-advised. You’ll likely be taxed 20 percent on it as well as suffer early withdrawal penalties, as though you withdrew funds from the account (as opposed to rolling them over into a new investment vehicle). Instead, work with your financial planner to make sure your entire eligible 401(k) distribution is sent directly to your new Roth IRA and taxed at the lowest allowable rate for you.

Getting Started

When you’re ready to start your 401(k) to Roth IRA rollover, don’t expect your employer to make it easy. There’s a mandate that they offer the option, but it can take some time. Since you need to have a brokerage account in order to have a Roth IRA anyway, it’s best to just take up the process directly with a professional. Start a consultation with one of our financial planners to get all of your questions answered to ensure you feel comfortable moving forward.

The 401(k) rollover to a Roth IRA path is a great way to plan for tax-free retirement years, but it’s not right for everyone. Let us help to see what type of 401(k) rollover would make the most sense for you.

America's Retirement Reality Check by Nancy Ellis and David Ellis
ARE YOU PLANNING FOR YOUR RETIREMENT LIKE YOU PLAN FOR VACATION?
ARE 
YOU
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