Should I Convert My 401k To A Roth IRA?
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- Опубликовано: 9 фев 2025
- Should I Convert My 401k To A Roth IRA?
In this video, we're diving into a crucial financial decision many individuals face: the prospect of converting a traditional 401k to a Roth IRA. Before making such a significant move, it's essential to understand the potential benefits and drawbacks.
🤔 Is converting to a Roth IRA the right choice for you? Join us as we explore the factors that can influence your decision, including tax implications, retirement goals, and individual financial situations.
📊 Pros of Converting to a Roth IRA:
Tax-Free Withdrawals: Roth IRAs offer tax-free withdrawals in retirement, providing potential tax advantages compared to traditional 401k's.
Diversification of Tax Liabilities: Balancing tax diversification can be a strategic move for long-term financial planning.
No Required Minimum Distributions (RMDs): Roth IRAs do not have RMDs during the account holder's lifetime, offering flexibility in managing retirement income.
📉 Cons to Consider:
Upfront Tax Costs: Converting a 401k to a Roth IRA triggers immediate tax liabilities, which can be a significant financial consideration.
Current vs. Future Tax Rates: Evaluating your current tax bracket against your expected future tax bracket is crucial in determining the potential benefits of conversion.
Individual Financial Situation: Your overall financial health and goals play a pivotal role in deciding if conversion aligns with your retirement plans.
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That is the best video on explaining conversion I've seen so far. Very detailed and in depth, thank you for this.
Glad you enjoyed it!
You can withdraw your converted amount, not the gains, after 5 years even if under 59-1/2. That's another way around the 59-1/2 rule for 401s and IRAs.
Yes!
This 5 year rule only applies to the converted money right not to regular contributions ?
Great video Drew! Wish I would have come across this many many years ago when looking at helping my wife with her old 401k. She will be 55 in 2025 and she has over $1 million in an old 401k. I have no clue what we should do with it. Roth or Traditional IRA conversion? Leave it in the old 401k and deal with it later? Seems like a Roth IRA conversion will be so very costly tax wise. Plus she is probably 10 to 15 years from retirement. Any help you can provide is greatly appreciated!
Thanks for watching! Please reach out to me directly and we can discuss: info@pearlwealthgroup or pearlwealthgroup.com
Great video Drew. I like the way you take the time and effort to go through details.
I appreciate that!
Great video.
Thanks!
I just started (2024) a Roth Conversion Ladder. I had intended on doing the conversions into one bucket, with the intention of not withdrawing any gains until much later - so, I wouldn't need to keep track of the 5 year cycles.
However, what if some unusual circumstance occurred that forced me to want to withdraw a large portion of my Roth account? Could I separate out the principal invested from the gains accrued?
Your separate buckets methodology has merit by simplifying the accounting of principal vs. gains. It isn't much more difficult to create five Roth accounts than one Roth account. Later combining the accounts (after all the 5 year time periods have passed) can be done by a simple call to my broker.
Another great video.
Thank you for always watching and commenting Punisher!
@@yourfinancialekg You're welcome.
I think I understand but want to be sure.
My income is 89000 married filing jointly so 12% federal tax. I have a traditional with 52000 in it. If I rolled the whole thing over at once would that mean that my income for this year is suddenly 141000 I would pay 22% on about 47000 of the rollover?
Thinking I should roll over about 5000 per year over the next 10 years (supposing income doesn’t go up/tax brackets change) because 94000 is 12% income limit
The idea is ok and simple, but is also unnecessary. Every time you do a transaction, there is always going to be Tax forms sent to you. You can track your money through that. You can also check the history of your transactions. There are multiple ways you can track your money. You can even call the financial company and ask them how much you are eligible to withdraw. Think about this, although it makes it simple to track your money but it's also important to keep your account page simple as well.
Thanks, Drew. Would those 6 Roth IRA accounts typically be at the same financial institution or would they need to be at different places?
I would say the same place just to keep it organized
Great example!!!!!
Great explanation. Thank you
Glad you liked it
Great audio quality on this one.
I heard about some mathematician computer programmer that figured out that Roth IRS are loved by the government as a way to get more taxes out of the people. Really? How many people are going to be in a equal or higher tax bracket in retirement realistically?
Good comment!
Drew why is it that seldom do FP ( such as you) suggest that 401k should be transferred to Roth 401k. Isn’t this the same thing or does the transfer/conversion has to be specifically Roth IRA? Please explain.
I am assuming that the client is retired. Other factors could keep the 401k in 401k form just as a Roth (ex. under 59.5)
Not all 401(k) plans allow t-401(k) conversions to Roth 401(k).; tax is due on that amount converted and if tax is taken from the 401(k) then early withdrawal penalty applies. If employees has t-401(k) and wants Roth 401(k), better alternative is to simply contribute to Roth 401(k) instead of converting.
It's because extremely few employers offer a 401k to Roth 401k conversion option (AFAIK, no employer currently offers such an option). The provisions for getting money into a 401k plan are set up by your employer.
Drew, I think I understand this. But to confirm, the amount you convert is taxed at your marginal tax rate, correct?
Yes
the only thing im confused about is WHEN you pay the taxes. is it during tax season when you file your taxes the next year? or is it in the moment when you roll the money over? i have a few thousand in my employers 401k and am trying to decide what to do with it when i change jobs! thanks :)
Normally you pay in April of the following year unless you need to pay an estimate based on the conversion. Work with a CPA or financial advisor (us!) to determine the individual tax situation.
There is no definitive answer to your question. The conservative rule of thumb is that you should pay the taxes in the month following the quarter that you do the conversion. That would be:
1st quarter _ NLT April 15
2nd quarter _ NLT July 15
3rd quarter _ NLT October 15
4th quarter _ NLT January 15
These dates are for filing federal estimated tax. State deadlines may vary.
I did a $130K Roth conversion in mid-December. I just paid the federal taxes on the conversion on Monday, January 13.
Note: There are some folks who said that they paid their previous year's Roth Conversion taxes on April 15 without incurring any penalties or audits. I don't know whether they were simply lucky, whether they were correct, or whether the IRS doesn't know the answer either.
Note2: The IRS has no way of tracking Roth Conversions. Because of this, the IRS will sometime ASSUME that the individual actually did the conversion at the start of the year - even when the conversion was done at the end of the year. To avoid being penalized for failing to pay estimated taxes on time, I plan on attaching Form 2210 (using the Annualized Income Installment Method to justify the 4th quarter tax payment) with my 1040 when filing my tax returns this year.
I have 35k in my old 401k and its just sitting there, should I converted it to Roth? Turning 45 this year. How much will I be taxed?
Q1 Insufficient information to recommend solution however generally better to continue contributing to 401(k) before considering converting t-401(k) to Roth IRA.
Q2 Taxes paid contingent on your current federal tax bracket. If in 22% FTB and $35k conversion keeps you in 22% FTB, it'll cost you ($35k * 0.22 =) $7,700 in federal tax. State tax may also apply.
Is it better to convert at a lower tax bracket?
That would be the goal but with taxes and where they might be going, now seems good!
Hi Drew, I accidentally made a mistake and rolled 401k into roth IRA, and my tax rate is 24%. Is that super stupid or there is a good thing there? I am 38. I understand i will need to pay tax but is there penalty or something.. supper scared
It's not a mistake if it went into an IRA from a Traditional 401k. No taxes on that kind of rollover.
But it went Roth IRA, not traditional IRA😢
@@darineedtippimanchai3865it’s good and bad. Yes you have taxes to pay but if you don’t touch the money where it is now, the compounding interest will be phenomenal by the time you reach 59 1/2 yrs old and it’s all tax free!
Is the 5-year waiting period only for those under 59 1/2 doing the conversion or for anyone?
Depends on how you interpret the tax code. I would consult with your CPA. I prefer to interpret the 5 year rule no matter how old but others say 59.5 is an exception to the rule.
Well it has to go from a 401k to an ira if you leave your company
Only true if less than a certain amount, like 5k or so. Some companies allow you to keep a 401k above this amount.
You can keep your 401k in retirement. You just cannot contribute more to it. You can still reallocate, withdraw or convert funds. Most people convert from a 401k to an IRA after retirement due to limited investment choices in company 401k's.
Okay yes. True. I always rolled to ira,s bc of more choices and to keep things streamlined and a lot less fees
Thanks for commenting!
thank you for your content! call me out if i am wrong! thx! @@yourfinancialekg