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Should You Convert Your 401k To An Ira

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Why Would You Convert Your Ira Or 401k Account To A Roth

How Much Should You Convert To A Roth IRA?

Carefully consider the reasons whether to convert your IRA or 401k account to a Roth.


Are you worried that federal income taxes will increase in the future due to the burgeoning federal debt? If that possibility concerns you, you might be thinking you should convert your traditional IRA and 401k retirement savings accounts to a Roth account to save money on your taxes.

Before you decide, youll want to consider the good reasons people choose to convert part or all of the money in their traditional 401k and IRAs to a Roth account and whether those reasons will work in your favor.

First, lets look at the key features of traditional vs. Roth IRAs and 401k accounts.

Key features of Roth vs. traditional 401k and IRAs

With traditional IRAs and 401k accounts, you arent taxed on the money you save each year, and you wont be taxed on your investment earnings until you make withdrawals. When you begin withdrawing from those accounts in retirement, the money you withdraw is subject to federal income taxes. You might also have to pay state income taxes depending on your state of residence. For many states , their tax rules follow the federal income tax rules.

When you reach age 72, the required minimum distribution rules require you to withdraw minimum amounts from any traditional IRA and 401k accounts you have and include the withdrawal amounts in your total taxable income.

In addition, Roth IRAs arent subject to the RMD rules, but Roth 401k accounts are.

Why You Should Move Your 401 Into An Ira


The 401 is a blessing for many people, as it allows them to build wealth over time using dollar-cost averaging. Still, sometimes it makes more sense to channel some of that money from the employer-based account into your own individual retirement account. The ever-astute Rick Kahler, the founder of Kahler Financial Group, in Rapid City, S.D., tells us why:

Larry Light: Why and when should you move your 401 into an IRA?

Rick Kahler: If your employer offers a 401 or other retirement plan, contributing to that plan is a foundation of your retirement savings. However, as you approach retirement age, you might consider moving some of your retirement funds out of your employer’s plan and into an IRA at a custodian like TD Ameritrade or Fidelity.

Such a rollover is often done when you leave an employer, though many employers give you the option of keeping your retirement account with them. What isnt popularly understood is that you also can do a rollover while you’re still employed, as long as you are over 59½.

Light: Why do this?

Kahler: One reason to consider leaving your employers plan is that most of them have higher overall fees than an IRA, especially if you choose from low-cost index mutual funds or exchange traded funds from a company like Vanguard or Dimensional Fund Advisors. Its not uncommon to save up to 1% annually by making a rollover into these mutual funds.

Light: What about withdrawing the money to live on? Is there a difference?

Transfer Your 401 To Your New Job

Transferring your 401 to your new job is like a 401 to 401 rollover. Depending on the set up of your new plan, its probably a better option than leaving it behind but might not be as beneficial as rolling your 401 to an IRA. Check the plan documents of your new employers 401 to confirm the plan accepts incoming rollovers.

Also Check: What Is Asset Allocation In 401k

How To Get Emergency Cash From Your 401 And Keep On Investing

With a partial cash withdrawal, you would first roll all of your 401 funds into an IRA. By leaving part of your funds in a cash position within the IRA, you have cash as needed. Meanwhile, you can invest the remainder as per your retirement strategy. Its really an option of last resort. However, a partial approach makes the most of a dire situation, says Markwell.

No matter what options you consider or eventually choose, Markwell has this advice to offer: One of the advantages of working with a financial advisor during a career transition is that you can reduce your stress level and emotions, says Markwell. And with a clearer head, you can make decisions that will help in putting you on a more solid track to a successful retirement when the time comes.

Should You Pursue A Roth Conversion

Should i rollover my 401k to ira

When considering whether to rollover retirement funds, you may want to consider moving funds to a Roth IRA or Roth 401. You would owe tax on the funds you convert in the year that you convert them. But from that point forward, you will enjoy the benefits of a Roth account.

If you also want your heirs to be able to convert the retirement assets they inherit from you into Roth accounts, talk to your tax advisor about how best to accomplish your goals with qualified plan dollars.

Read Also: How Do I Find My Old 401k Account

When You Leave Your Employer You Need To Weigh The Pros And Cons Of Moving Your Retirement Savings

EDITOR’S NOTE: This article was originally published in the June 2010 issue of Kiplinger’s Retirement Report. To subscribe, click here.

When Warren Smith’s employer laid him off earlier this year, he had to make a decision that all new retirees face. He needed to decide whether to roll his 401 into an IRA.

Smith, 62, had been contributing 22% of his salary to his employer plan. The company, which coordinates corporate events, now uses him as a contractor, but he is not allowed to contribute to the 401. “I didn’t feel comfortable keeping my money there,” says Smith.

Also, Smith needed to make sure that his savings would last for decades, and he didn’t think that the six mutual funds that the 401 offered would do the trick. Smith, who lives in El Cajon, Cal., says, “I didn’t have the diversification that I have in an IRA.” He decided to roll his 401 money into an IRA and hired an investment adviser to help manage his nest egg.

As baby-boomers join the retiree ranks, they are facing the same roll-or-not-to-roll decision. And many middle-aged workers, forced to find new jobs after being laid off from their old ones, must decide whether to leave their retirement stash with the old employer or move it to an IRA.

Direct And Indirect 401 Rollovers

Before you roll over your 401, youll need to open an IRA account. You can do this at virtually any major brokerage firm, mutual fund company or robo-advisor. Do some research, then head to your financial institutions website to open your account. At some point, youll want to talk to a customer representative to find out whether the rollover and conversion can be done at once or if they are done sequentially. If its the former case, youll just have to pick your investments once. If its the latter, youll want to keep the money liquid in the IRA before converting to a Roth.

Once youve opened the IRA, you can contact the company managing your 401 account to begin the rollover process. You can do this online or over the phone. Your 401 plan administrator will then transfer your funds into your new IRA account. This is called a trustee-to-trustee or direct rollover, and its the easiest way to do it.

Another path is an indirect rollover. In this case, the balance of the account is distributed directly to you, typically as a check. Youll have 60 days from the date you receive the funds to transfer the money to your custodian or IRA company. If you dont deposit the funds within the 60 days, the IRS will treat it as a taxable withdrawal, and youll face a 10% penalty if youre younger than 59.5. This risk is why most people choose the direct option.

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You Want To Relax Early

Proponents of the FIRE movement invest aggressively so they can become work-optional in their 50s or even earlier.

If thats your plan, youll want at least a portion of your investments to be in an account thats more accessible than a 401, which you cannot tap without penalty before the age of 59 ½. A strategy known as a Roth conversion ladder involves converting 401 funds into a Roth IRA over a period of years.

Its a bit complex, says Hernandez. Theres a small number of people that it could make sense for. Its important to understand the tax impact.

Should You Convert Your Traditional 401 Into A Roth 401

Should You Convert Your Traditional 401(k) Into a Roth 401(k)?

8 Min Read | Jun 9, 2022

A few years back, the Roth 401 was the new kid on the block when it came to company-sponsored retirement accounts.

But now, 86% of employers offer a Roth 401 option to their employees.1 If the Roth 401 is on the table at your workplace, thats great news for you!

But if your company is offering a Roth 401 option, youre probably wondering what to do with your existing traditional 401. Is converting a traditional 401 to a Roth the way to go? Or should you just leave it alone?

There are some things to keep in mind before you make this decision, so lets dive in.

Also Check: How To Set Up 401k Contributions

Why You Can Trust Bankrate

Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. Weve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next.

Bankrate follows a strict editorial policy, so you can trust that were putting your interests first. All of our content is authored by highly qualified professionals and edited by subject matter experts, who ensure everything we publish is objective, accurate and trustworthy.

Our reporters and editors focus on the points consumers care about most how to save for retirement, understanding the types of accounts, how to choose investments and more so you can feel confident when planning for your future.

Pro #: You May Gain Flexibility

Your new employers plan may have different investment options, loan options, protections against potential creditors, or other benefits that better suit your needs than your former employers plan. If you continue working until and beyond 72 years of age, you may be excused from required minimum distributions if your new employers plan allows it.

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Cons Of Rolling Over A 401k:

Rolling a 401k over into a new retirement plan isnt always the best option. Besides rolling a plan into a new employer-sponsored plan or a personally directed retirement plan, you can leave the plan as it is or cash out the plan. Depending on your situation one of these options might be better for your situation. However, whichever option you choose, you should make sure that you have done your research first.

Lets take a look at a few of the reasons that you might not want to convert your plan into a rollover.

Pros And Cons Of Rolling Over 401 To Ira

Rolling Over a 401(k) to a Roth IRA: Should You Convert to a Roth?

Find out the pros and cons of rolling over 401 to IRA, and the potential costs that you are likely to save or incur if you consolidate your multiple 401 accounts into one Individual Retirement Account.

When you change jobs and settle in your new workplace, one common question that comes to mind is whether to rollover your 401 to a new Individual Retirement Account or keep the funds in your former employerâs 401.

Most of the time, a new IRA has more benefits in terms of fees, investment options, and tax savings than a 401, but it is important to know the pros and cons of rolling over 401 to IRA before making the switch. The pros of rolling over 401 to IRA include wider investment options, lower fees, penalty-free withdrawals, and an opportunity to consolidate old 401s into one location. The cons of rolling over 401 to an IRA include limited creditor protection, lost access to 401s loans and delayed access to funds until you are 59 ½.

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Roll It Into A New 401 Plan

The pros: Assuming you like the new plans costs, features, and investment choices, this can be a good option. Your savings have the potential for growth that is tax-deferred, and RMDs may be delayed beyond age 72 if you continue to work at the company sponsoring the plan.

The cons: Youll need to liquidate your current 401 investments and reinvest them in your new 401 plans investment offerings. The money will be subject to your new plans withdrawal rules, so you may not be able to withdraw it until you leave your new employer.

Ira Vs Qualified Plans

Itâs true that traditional qualified plans and IRA accounts share many similarities. Both IRAs and qualified plans typically come in two varieties:

  • Traditional: These accounts allow you to grow your money tax-deferred until it is withdrawn, at which time it is generally considered taxable income.
  • Roth: These accounts are funded with after-tax money. This means that when you withdraw your money in retirement, you will not owe any tax on your withdrawals.

Additionally, both types of accounts also require you to reach 59 ½ before accessing all the funds there is typically a 10 percent penalty for early distributions in addition to taxes that you may owe. With a Roth IRA, you can withdraw contributions prior to 59 ½, but not earnings.

There are also some other important differences. An IRA is owned by you as an individual, while an employer sponsored plan like a 401 is technically owned by the employer. Additionally, IRAs tend to offer more flexibility and investment options compared to 401 plans.

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Con: Limited Creditor Protection

If someone wins a lawsuit against you, the Federal Employment Retirement Income Security Act prevents such parties from accessing the funds in your 401 to settle their claims. However, IRAs do not enjoy the same level of protection as 401 accounts. A creditor may access your IRA funds up to a certain limit to settle their claims. Some IRAs may offer creditor protection up to a specific level, but these limits vary from state to state.

Disadvantages Of Rolling Over Your 401

401k Rollover Options 2022 (Rollover to IRA, to Roth IRA, or to New Employer)

1. You like your current 401

If the funds in your old 401 dont charge high fees, you might want to take advantage of this and remain with that plan. Compare the plans fund fees to the costs of having your money in an IRA.

In many cases the best advice is If it isnt broken, dont fix it. If you like the investment options you currently have, it might make sense to stay in your previous employers 401 plan.

2. A 401 may offer benefits that an IRA doesnt have

If you keep your retirement account in a 401, you may be able to access this money at age 55 without incurring a 10 percent additional early withdrawal tax, as you would with an IRA.

With a 401, you can avoid this penalty if distributions are made to you after you leave your employer and the separation occurred in or after the year you turned age 55.

This loophole does not work in an IRA, where you would generally incur a 10 percent penalty if you withdrew money before age 59 1/2.

3. You cant take a loan from an IRA, as you can with a 401

Many 401 plans allow you to take a loan. While loans from your retirement funds are not advised, it may be good to have this option in an extreme emergency or short-term crunch.

However, if you roll over your funds into an IRA, you will not have the option of a 401 loan. You might consider rolling over your old 401 into your new 401, and preserve the ability to borrow money.

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Figuring Out The Fees

Another factor in your decision is tough to decipher: How does the cost of investing inside the 401 compare with what you’d pay if your money was in an IRA? You may have a hard time figuring that out because the planâs administrative and record-keeping fees are not listed on individual investment statements.

The first step is to check the expense ratio of each fund offered by your company plan. You can find the expense ratio, which is the percentage the fund manager demands to cover its expenses, on the fund’s Web site or perhaps on your plan’s Web site. An expense ratio of 1% or less is reasonable. If you invest in an IRA, you can find many funds with low expense ratios.

A new tool can help if you work at one of the 45,000 companies whose plans have been rated, based on administrative costs, investment fees, returns and quality of investment choices, by BrightScope, based in San Diego. Visit, enter your company name, and the software kicks out a score between 1 and 100 . “People often discover their 401 is more expensive than the fees they would pay in an IRA,” says Mike Alfred, chief executive officer of BrightScope. Total plan costs for the largest plans can be as low as 1%, but some small plans charge more than 3%.

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