I have a 401k from my former employment. My CPA says to turn into a traditional IRA and then over to a Roth IRA for tax benefits eventually. He suggest investing in a very low risk A bonds and 25% low risk stock.
His reasoning is we are only taxed now on the lower end of balance, but later as it grows will be beneficial to us then.
I am 52. I plan on using the funds after 59.5 yrs.
1. Is there always a fee connected with rolling over into an IRA — bank, cpa, etc.
2. Does this sound like a wise?
I am very conservative in my finances.
Your question has three parts actually:
Should you roll over a 401k to a Traditional IRA?
If you think that the Traditional IRA gives you access to better investment options, then yes you should roll it over. The tax rules are the same for a Traditional IRA (in this case it’s called a Rollover IRA) and a 401k. There is generally no fee associated with rolling over an account.
Should you convert a Traditional IRA into a Roth IRA?
When you convert, you pay taxes on the entire Traditional IRA balance because you didn’t pay income taxes on that amount before you contributed it. If you remember, your 401K contributions were deducted from your paycheck, thus making it tax-free; and since Roth IRA funds are post-tax, they extract the tax when you make the conversion. Will this be beneficial to you? Only if you think that your income tax rate will be higher that it is now when you’ll be withdrawing the funds in seven years. Only you know that so I can’t tell you what I’d do in your situation.
A subquestion to the “whether you should convert question” is how you’d pay for it. You can pay for the tax with funds outside of your IRA’s or you can pay using the principal within the IRA. If you need to tap into the principal to pay for the tax, I probably wouldn’t do the conversion because you’re sacrificing earning potential when you decrease that principal. If you can pay for the tax outside of the IRA, then you have a decision on your hands.
Does this sound wise?
It only sounds wise if you want to go through the trouble (or are willing to pay this CPA to do it for you, which has a lot to do with why he or she suggested it for you) and if you think your income tax rate will be higher in seven years. Luckily your conservative investment style has nothing to do with this, if you think you’ll be taxed more in 7 years and you can pay the tax with funds outside of the IRA, then you probably want to convert. If you don’t think you’ll be taxed more in 7 years, don’t do it. If you don’t think you can pay for the conversion (which will cost you your tax rate times whatever you convert), don’t do it.