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May 16 2011 12:00AM


As a 63-year-old retiree about to collect Social Security, should I roll my 401(k) into a Roth Individual Retirement Account (Roth IRA)?


“There are several questions that a planner would need to know before being able to give you on-target advice regarding your inquiry,” said FPA member Janet F. Ramsey, CFP®, at Premier Advisor Group. "Among several questions, I would ask you

  1. What other sources of income, if any, will you be receiving each year, besides Social Security?
  2. What are your living expenses each year?
  3. What is your income tax bracket, both federal and state?
  4. How much is in your 401(k)?
  5. What other investments do you own, besides your 401(k)?
  6. Are your risks, such as covering medical expenses or long-term care, covered in any way?
  7. Is your 401(k) pre-tax or in a Roth 401(k)?
  8. Is this the optimal time to start drawing your Social Security? How would your future benefits change if you take Social Security at a different time?
  9. Are you married? If so, what are your spouse’s Social Security withdrawal options and amounts?
  10. How is your health and how is the health of your spouse or anyone else who might be dependent upon your income stream? For example, are there any conditions present which could affect life expectancy?

“You will pay ordinary income taxes on any amount of a traditional 401(k) converted to a Roth,” said Ramsey. “If your 401(k) is already in a Roth 401(k), it may make sense to roll it into a Roth IRA, but there are special rules about this. I would seek the assistance of a qualified financial adviser, as decisions made around the time of retirement can be very important to your future financial security. There are also opportunities to take actions and fit the pieces of your plan together like a puzzle that can help you maximize your resources. Also, a rollover might not have to be done all at one time, but possibly could be done over more than one tax year, gradually moving funds to a Roth IRA, if that made sense in your big picture.”

FPA member Charles E. Carrick, CFP®, ChFC, of DMJ Wealth Advisors, said his first question would be in identifying the objective in converting your 401(k) assets to a Roth IRA.

  • As you probably are aware, you typically, based upon your employer plan provisions, transfer you money from your 401(k) plan to a regular IRA or a Roth IRA.
  • If you transfer to a regular IRA, there would be no tax impact and you would be subject to the normal withdrawal requirements beginning at age 70½.
  • If you convert to a Roth IRA, then you would recognize the income tax due on the untaxed portion of the 401(k) proceeds, with the IRA now being a Roth.
  • Why would you do this?
    • You are in a low tax bracket now and expect to be in a higher bracket later. Otherwise it may be better to wait until you are in a lower bracket.
    • You expect there would be a significant period between now and the time you would use the proceeds in your Roth IRA. The longer it can sit and mature, the greater the value you would typically derive from this transaction.
    • You may want to pass this on to the next generation such that they would not have to pay income tax on the proceeds upon eventual distribution.
    • You wish to purchase an asset in your Roth IRA which you feel has substantial appreciation potential.

Also, Carrick suggests you consider the following:

  • The additional income recognized in the current year could increase the tax on your Social Security benefits, depending upon your overall income.
  • You should attempt to pay the tax on a conversion from monies outside of your IRA, in order to obtain the greatest benefit from the use of this vehicle.
  • It is assumed that you have retired or terminated from your employer and the plan document allows for a rollover directly to a Roth IRA.
  • Depending upon the value of your 401(k), you may want to consider converting small portions over a period of time versus all at once.
  • Depending upon the balance of your other assets between already taxed (non-qualified) and retirement assets (Qualified, IRA), it may be better to retain as an IRA. An investor should consider diversifying investment pools between taxable and non-taxable as well as between asset classes.

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