President, Insurance Associates Agency Inc., West Chester, OH
That is a great question. Rolling over a traditional tax qualified 401K account to a Roth IRA would generate taxes and penalties so the benefit would certainly not be the tax savings, now would it? A 401K converion transfer is called a Roth Conversion. There is a conversion option that might work and we call it a "backdoor Roth IRA" and it might provide some advantages but will require several steps and tax computations and may not be appropriate for you based on the information provided. Your best answer would be to consult with a local agency to learn more about how this conversion tactics might benefit you in a Roth IRA.
Business Development Officer, T.D. McNeil Insurance Services, Fresno, California
The question about a Roth IRA conversion has to do with taxes. If you are currently in a low marginal tax bracket and anticipate being in a higher bracket soon, then a conversion is something to discuss with a Retirement Income Certified Professional (RICP®) The benefit would be that you can withdraw money from a Roth IRA free of income tax after the plan has been held for five years and you are over 59.5 years old, disabled, or making a first time home purchase.
Agent Owner, Gilmore Insurance Services, Marysville, Washington State
Why roll over a 401k into a Roth IRA? Well I can't honestly think of a good answer to do this. In order to do this transfer, if you qualify for a Roth in the first place, would require you to cash out your 401k and combined with your current income, might place you in a higher tax bracket, as well as the extra 10% penalty for early redemption, and possible redemption fees from the 401k as well.
So you might be looking at a "loss" of anywhere from 35-45% of the value of your 401k just from taxes and early redemption penalties. What you would have to figure is how many years would it take you to get back to even? That would include this loss and the loss of gain years spent getting back to even.
How about if you qualify, owning both? Use new money for your Roth. Yes, it will be taxed, but it won't be taxed, penalized and require years to recover the market loss. Have both.
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So you might be looking at a "loss" of anywhere from 35-45% of the value of your 401k just from taxes and early redemption penalties. What you would have to figure is how many years would it take you to get back to even? That would include this loss and the loss of gain years spent getting back to even.
How about if you qualify, owning both? Use new money for your Roth. Yes, it will be taxed, but it won't be taxed, penalized and require years to recover the market loss. Have both.