401(k) rollover to Roth IRA


K

Kurt Ullman

Can I rollover a 401(k) to a Roth IRA with no tax consequences. Since I
can never keep straight what is pre-tax and what isn't and how that
impacts for a Roth, I thought I'd ask.
If there are tax implications, would it be better to rollover my
last employer's 401(k) into my new employers?
Thanks for any help.
 
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R

Rich Carreiro

Kurt Ullman said:
Can I rollover a 401(k) to a Roth IRA with no tax consequences. Since I
Short, over-simple answer: No

Longer, answer:
* If your 401(k) has a Roth sub-account, that sub-account *can* be rolled to
a Roth IRA with no consequences.
* But there will be tax consequences with respect to the rest of the
account -- the pre-tax money will be taxed as ordinary income (though
no early withdrawal penalties).
* If you have any non-Roth, non-pre-tax money, that will not be taxed.
If there are tax implications, would it be better to rollover my
last employer's 401(k) into my new employers?
Not necessarily, no. What exactly are you looking
to accomplish?
 
J

JoeTaxpayer

Longer, answer:
* But there will be tax consequences with respect to the rest of the
account -- the pre-tax money will be taxed as ordinary income (though
no early withdrawal penalties).
A conversion to Roth from the pre-tax 401(k) is taxed, agreed. But
worse, no chance to recharacterize.

Better to transfer to an IRA, wait a moment, then convert if you wish.
If (a) the investment drops or (b) you find you are thrown into a higher
bracket than you expected, you can recharacterize, any or all.
 
K

Kurt Ullman

Better to transfer to an IRA, wait a moment, then convert if you wish.
If (a) the investment drops or (b) you find you are thrown into a higher
bracket than you expected, you can recharacterize, any or all.
But then I sorta lose out on my major goal which is to make my life at
least a little easier. (grin)
 
K

Kurt Ullman

Rich Carreiro said:
Short, over-simple answer: No

Longer, answer:
* If your 401(k) has a Roth sub-account, that sub-account *can* be rolled to
a Roth IRA with no consequences.
* But there will be tax consequences with respect to the rest of the
account -- the pre-tax money will be taxed as ordinary income (though
no early withdrawal penalties).
* If you have any non-Roth, non-pre-tax money, that will not be taxed.


Not necessarily, no. What exactly are you looking
to accomplish?
I currently have a Roth IRA, a 401(k) at Previous Employer and 401(k)
at Current Employer. I'd like to consolidate at least a little bit. If
not a big deal, I'd like to take PE's 401 and meld it into my Roth..
largely to avoid all the extra fees. If not, I'd like to meld the
401(k)s together so I don't have to keep track of three accounts.
 
J

JoeTaxpayer

But then I sorta lose out on my major goal which is to make my life at
least a little easier. (grin)
After the move to IRA, convert the full amount to your Roth. Next April,
the cost of convenience will be clear, and you can decide then.
I believe in TANSTAAFL.
 
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T

taruss

| I currently have a Roth IRA, a 401(k) at Previous Employer and 401(k)
| at Current Employer. I'd like to consolidate at least a little bit. If
| not a big deal, I'd like to take PE's 401 and meld it into my Roth..
| largely to avoid all the extra fees. If not, I'd like to meld the
| 401(k)s together so I don't have to keep track of three accounts.

The fundamental issue, as others have already pointed out, is that your 401(k) likely consists of mostly or entirely pre-tax money. A Roth IRA uses after-tax money. So to go from pre-tax to after-tax you have to pay tax.

As for what you can do, you have some choices but perhaps none that achieve all of your goals.

1. Roll-over the previous employer's 401(k) to a Traditional IRA. No tax consequences, but you still have three accounts at the end. But perhaps if you have both IRAs with the same custodian, they will be reported in separate parts of a single statement and that may achieve enough simplification.

2. Roll-over the previous employer's 401(k) to the current employer's plan. The current employer's plan has to allow this, since that isn't required. You would then have two accounts. The roll-over may become complicated if the accounts don't support the same investment choices, so you may have to convert to cash. That could also be an issue with plan #1, but might be less likely.

3. Do a roll-over and conversion to Roth IRA. That leaves you with two accounts, but a tax bill for the amount of the plan that is rolled over.

Out of curiosity, which account has the fees that you are trying to avoid?
For IRAs, it should be possible to find a custodian that doesn't charge much if anything as long as you don't mind not getting advice on the investments in the IRA.
 
K

Kurt Ullman

Out of curiosity, which account has the fees that you are trying to avoid?
For IRAs, it should be possible to find a custodian that doesn't charge much
if anything as long as you don't mind not getting advice on the investments
in the IRA.
I have been reading about all the 401(k) fees in a number of magazines,
TV shows and one of my investment newsletters. The IRA is (or would be)
at Schwab so that is not a big deal.
 
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J

Jake29

Kurt said:
I have been reading about all the 401(k) fees in a number of
magazines, TV shows and one of my investment newsletters. The IRA is
(or would be) at Schwab so that is not a big deal.
If low fees and simplicity is what you want, you may want to look at
Vanguard and open a regular IRA and a Roth IRA there (
https://investor.vanguard.com/home/ ). They are supposed to be one of the
lowest fee structure companies. I am not a tax person and I don't have any
connection with Vanguard other than that I opened an IRA account there and I
rolled over my previous employer 401(k) and Roth IRA accounts to two IRA's
in my Vanguard account.
 

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