Investing, Retirement 

401(k) to Roth IRA Conversion

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In reading a lot of sources online, I’ve come to the conclusion that I might be best served by rolling over my 401(k) into a regular IRA and then converting it into a Roth IRA. You can’t go straight from a 401(k) into a Roth IRA, I will have to convert it first into a regular IRA before I can convert it into a Roth.

The rules on converting a regular IRA to a Roth seem pretty straight forward for me – I’m single, I make a modified adjusted gross income of less than $100,000, so I should be eligible to convert an regular IRA into a Roth IRA. There is also a 12 month rule that states you can’t roll over twice in twelve months but there is an exception and the exception is for rolling your regular into a Roth – so I could roll a 401(k) into an IRA and then into a Roth in 12 months without penalty.

I’m leaning towards just taking all of my 401(k), rolling it around until it becomes a Roth, and then putting it into some Vanguard funds. Now I’m dizzy…

{ 21 comments, please add your thoughts now! }

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21 Responses to “401(k) to Roth IRA Conversion”

  1. CK says:

    Finally you’ve come to your senses.

  2. Chrees says:

    I have wanted to convert my regular IRA to a Roth the past several years but keep tripping some rule where I can’t do it. I’m hoping this year is the year–it is a great vehicle to be in!

  3. jim says:

    The only thing that concerns me about this move, and I have to research it further, is that I’d prefer to pay the taxes out of pocket instead of dipping into the 401(k) funds to cover it and my 401(k) balance is around $50,000 – I am unsure, i.e. haven’t read enough or pulled out the calculator, how much I have to pay and with a $7,000 purchase (windows/sliding doors) and a wedding, this may have to wait.

  4. FMF says:

    I think you’re on the right path.

  5. Rich Slick says:

    Wait a minute! How much money are we talking about here? How much is in that 401k? I’ll say this again as I’ve said it a dozen times elsewhere: Don’t make the assumption that tax laws won’t change sometime in the future! While eveyone believes they’re going to walk away with tax free millions in their investment portfolios there is always the possiblity that taxation will occur on Roth’s.

    I know that sounds as heresy to many but you have to be a bit skeptical and wonder why this great “opportunity” is being offered to everyone now.

  6. jim says:

    I make it a general practice to make decisions based only on existing facts and the fact is a Roth will not be taxed as it stands. Keeping it in a 401(k) runs the more likely risk that future income tax brackets will be higher (which could be the result of the US starting a nationalized health care system, something I think is necessary and more likely to happen than Roth taxation) than they are now.

    If you really want to guess, my prediction that it is more likely tax rates will be increased than a Roth will be taxed. Why? Because taxing personal income twice (versus corporate income, which is taxed twice) would set a precendent… increasing marginal tax rates would not. Again, I can’t see the future (or I would’ve won the lottery… twice).

  7. Rich Slick says:

    Personal income is taxed twice already it’s called Estate Tax. Of course many people don’t pay it since they’re usually under the cap but it’s still there.

  8. jim says:

    If you consider estate tax taxation on your personal income then sales tax is the same, but I don’t (in either case). Personally I don’t like estate taxes but that’s another issue I’ve already bored everyone with in the past.

    Slick: Do you believe keeping it in a 401(k) pre-tax account is the correct strategy? all or none or a mix?

  9. Rich Slick says:

    That depends on many variables: how old you are, what kind of money you’ll need, etc. Personally, I max my 401k every year and primarily sit in cash. When the time comes to change employment, I immediately move the money to an IRA at a brokerage firm. I dislike mutual funds and prefer to invest my own money my own way. Lately, I’ve been contemplating using IRA money to invest in Real Estate (not in bubble areas) via self-directed IRA but I haven’t done that yet.

    As for Roth’s, I contribute the max every year there as well so I use both pre-tax and post-tax accounts and I’ll continue along that path until I retire. IMHO, I think the risk is too great that tax laws change in the future to risk “all your eggs” in a post tax basket. I’m skeptical because we have a “conservative” government in office that has managed to make government spending the worst in history. Imagine what government spending will be with a not so conservative government!

  10. CK says:

    Could they change Roth IRA taxation rules in the future? Sure they could, but you find me a politician who touch that with a ten foot pole. Talk about political suicide. It might even be dangerous to their own health if you get my drift. They wouldn’t even be able to pass it off as a stab at the evil rich due to the income eligibility phaseout. Off topic but much much more likely to come is taking the cap off of social security taxes.

  11. Rich Slick says:

    I’m not sure politicians are going to have much choice. The huge baby boomer burden is going to fall on some group of politicians and the boomers WILL be the largest demographic voting block. Who would you want to appease? The 80 million boomers or the 40 million X’ers? Who will more likely vote? Who will not?

    I think the best approach for now is to do both a Pre-Tax and Post-Tax retirement account. I’m simply happy that we’ve gotten to the point where we can do both!

  12. Steve Mertz says:

    I think you’re making a great choice! I’d rather you pay the taxes now rather than later. I’d bet 20 years from now taxes will be a lot higher. I’ve also seen the IRS grandfather those who have made changes based on current legislation-So, go for it!

  13. Mike says:

    When you become un-dizzy, there is one more thing that you may want to consider:

    Holding off converting to a Roth IRA until there is a significant drop in the market.

    If you convert while your IRA is doing well, you’ll have a larger amount counting towards your income limits, and a larger amount on which to pay taxes. If you wait until there is a significant drop in the market, you’ll still get the benefits of the Roth, but will have a lower addition to income, and pay less taxes on the conversion.

    That’s what I did. Just something to consider. Good luck with your decision!

  14. Rich Slick says:

    I just did some math over at to see what would happen if I rolled over 100k from an IRA to Roth. The first thing that struck me was the bold heading which read, “Your IRA could decrease by $50,570”

    Ouch! I won’t qualify for the roll over anyway so it doesn’t really matter. I’m assuming that the numbers work for you guys since some of you have done it.

    It did occur to me, however, to wonder what would happen if everyone decided to convert from traditional IRA to Roths. There would be an immediate bump in tax revenues but what would happen 10, 20, and 30 years from now? Where would the government get the money to make up for those lost revenues? Good luck and I hope you post a follow up in the future.

  15. Pete says:

    Everyone talks about how tax rates may increase in the future, thus they rather get taxed now. This may or may not be true. Yet, you need to be careful when you convert all your money in one year, that your tax rate will increase this year. For example, if you are making around $50,000 you are currently taxed mainly at the 10% and 15% tax rates (possibly a little at 25%). Yet, if you convert another $50,000 to a Roth IRA, it is all taxed at the next tax brackets (25% and 28%).

    Now, if you wait until retirement to take the money out of the 401(k), the 401(k) would be taxed at the lower tax brackets IF you income is not as much as you are making now (adjusted for inflation). Thus, it is taxed at the current 10%, 15% and possibly 25% brackets. Now, the government may increase taxes in the future, yet how much can they increase the 10% 15% brackets? Double them to 20% and 30% (really)?

    If you are young and will have a jump in your salary, then it may be good to convert now. Yet, many are not focusing that the conversion is tax at the highest tax brackets (because it is additional income ontop of what you are making now) while the 401(k) income in retirement is taxed at the progressive tax rates (some at lower rates and some at your current tax bracket). Thus, taxes need to significantly increase for a conversion to break even (either by Congress increasing taxes or the individual getting a significant pay increase above inflation thus jumping to higher tax brackets).

    For more on this see

  16. carlo says:

    This website has tons of informatin about truly self directed IRAs. Sign up for the free CD.

  17. derek says:

    Keep in mind that you don’t have to convert the entire balance all at once. If your budget doesn’t allow you to pay the tax on the whole account, then don’t convert the whole thing at once (you can also manage your income tax bracket by doing partial conversions).

    All this “tax code will change stuff is ridiculous.” The tax code WILL change (not necesarily against the Roth IRA, but it will change).

    Imagine if you used this “tax code may change” argument with all of your financial decisions…you’d never get anywhere. (don’t take a mortgage and deduct the interest they may change the code, don’t invest long-term, they may change capital gains tax, don’t put money in the 401(k) they may change the code, don’t buy life insurance, they may change the code, etc., etc.)

  18. Weekly Roundup – 09/15/06

    Here’s a quick look at some of the personal finance articles that caught my eye over the past week.

    JLP put together compiled a monstrous list of ‘How-To’ posts that cover just about every angle of personal finance.
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  19. Spencer Hill says:

    With the new Pension Reform Act you can convert from a 401(k) directly to a Roth IRA. I can’t rember if you can do it now or after the first of the year. The bill had some many different dates for things i can’t rember them all or find my cheat sheet on it.

  20. Chris says:

    I think that it is a good idea to convert now for a variety of reasons (at least to the limit where you would bump yourself up to the next tax bracket). The question that you need to ask yourself is if your tax rate now will be higher or lower than when you retire. If you marginal tax rate now if lower, it would be beneficial to convert now and save on your taxes – and this looks very possible considering the low tax rate enviornment we have been in during the last decade. Historically marginal tax rates have been much higher and with a growing federal deficit there is no reason to believe that we won’t return to those high levels at some point in the future.

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