Roll over 401k to Roth IRA? 5 Reasons to Do It and Not to Do it!
Roll Over 401k To Roth IRA
The Small Business Jobs Act of 2010 allows you to roll over 401k to Roth IRA, even if you haven’t switched jobs or retired.
But just because you can do something, doesn’t mean you should. There are advantages and disadvantages when you roll over 401k to Roth IRA, and before you decide to convert, you should carefully weigh these pros and cons for your specific financial situation.
Are You Eligible to Rollover?
Before considering whether it makes sense for you to roll over 401k to Roth IRA, you’ll first need to make sure you’re eligible. If you’ve retired or switched jobs, then you almost certainly are. But if you’re staying with the same employer, then you generally have to be at least 59 ½ years old.
There’s also the issue of annual income for new contribution but not for conversion from 401k to Roth IRA. In 2012, if it’s $110,000 or less, you can contribute the maximum amount allowed by law, which is $5,000 a year below age 50 and $6,000 a year once you reach 50. From $110,000 to $125,000, you are allowed to contribute a decreasing amount, until at $125,000, you can’t contribute at all.
5 Reasons to Convert to a Roth IRA
You expect income tax rates to be higher when you retire than they are today. With both federal and state governments faced with large debts, this scenario is a distinct possibility.
Unlike 401k plans, Roth IRAs don’t require minimum distributions when you reach 70 ½ years old. Technically, the minimum distribution requirement does apply when you roll over 401k to Roth IRA, but you can avoid this by rolling your “Roth 401k” into a regular Roth IRA. If you still expect to be working in your 70s, avoiding the minimum distribution can allow you to continue to have tax protection for all your retirement savings.
You expect the value of your 401k to increase because you consider the stock market to be depressed at the moment. By converting to a Roth IRA now, you’ll be paying taxes on the depressed value and avoiding taxation of the appreciated value of the 401k when you retire.
If you can afford to pay for the additional income taxes on the Roth contribution without touching your retirement savings, you’ll in effect by increasing the amount of your tax-sheltered retirement savings.
If you’re near the cut-off annual income amount to be eligible for a Roth contribution, you can roll over your 401k to Roth IRA while you still have a chance. Particularly if your income is lower than normal right now due to the economy or other reasons, this could be your window of opportunity.
5 Reasons to Keep Your Money in a 401k
You’ll have to pay federal and state taxes on the amount you convert to a Roth IRA. If you can’t afford to do that without using funds from the 401k or other retirement savings, conversion very likely may not be wise.
You can’t deduct contributions to a Roth IRA, as you can with a 401k.
With a Roth IRA, you pay taxes on the year the money was earned. If you move to another state with a lower income tax rate when you retire, you’re missing the opportunity for tax savings when you withdraw money from the 401k. You will have already paid your taxes in the higher-tax state instead of the lower-tax state where you retire.
If you die before retirement, you’ll never gain the perceived tax benefit. In order to get the full tax benefit, you must live until all your Roth IRA contributions have been withdrawn.
You may pay more taxes on the earnings you use to contribute to a Roth IRA than you would when you withdraw from the 401k in retirement. This can occur—and often does—when people fall from a higher tax bracket in their working years to a lower tax bracket in retirement.