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 Post subject: Rolling 401k to Roth?
PostPosted: Wed Jun 20, 2007 2:24 pm 
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Ok gurus, I've got another fun question for you. :D

I was just reading a Consumer Reports article that says you could roll over a 401k into another regular IRA or even a Roth. If rolling into a regular IRA there's no penalties since it's also tax differed. If rolling to a Roth, you will have to pay taxes though.

My question is this: I'm currently employed and have a 401k through my employer. Can I roll over all my current funds that are in that 401k to a Roth that I have setup? I guess what I'm asking is that I know if I left my current employer I could roll the funds. Can you do that while still contributing to the 401k?

And what do you think about this? Do you think it would be a decent idea to move these funds into a Roth? If the Roth is well diversified (I'm using a Vanguard target retirement fund) should I put all our retirement money in that? I know that it would also be a big tax hit now, but I figure my tax rate isn't going to get any lower in my lifetime (25%).

Thanks for the help guys!


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PostPosted: Wed Jun 20, 2007 2:46 pm 
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Odds are very strongly against being able to do what is called an in-service rollover. Very, very few plans allow it. I think in my 2 years of dealing with 401k plans at Vanguard I saw maybe 2. So realistically, this isn't an option.

However, when you leave your company (separate from service) you can absolutely roll over your 401k (and should do so immediately in most cases). Starting in 2010 I think you will be able to roll directly to a Roth without having the intermediate step of rolling to a Rollover IRA and then converting. You'll still have to pay the taxes but the process will be faster. Until that time, when you do a rollover from a 401k it goes initially to a Rollover IRA (same as a TIRA pretty much) and then you convert it.

You will have the choice of converting all at once or in chunks. Typically I recommend converting in chunks for a few reasons:

1 - since that conversion amount is counted as income it is a VERY real possibility that rolling the entire amount (assuming it's a larger amount) could put you into a higher tax bracket resulting in more taxes being paid.
2 - converting in chunks allows you to better manage the tax hit. You can (and should) adjust the withholdings on your paycheck to cover the additional taxes you'll have to pay for the conversion. You can do this when you roll the whole amount too but it will probably hurt more.
3 - converting in chunks allows you to time the conversions to years where your income might be lower due to losses in the market or going back to school or reduced income for whatever reason. This can save you a chunk.

Another thing to keep in mind is that if you make over $100k/year you can't do a conversion until 2010 anyway.

I'm personally a huge fan of the Roth and recommend people get as much in there as they can while they're young. But 401k plans are good too and it's smart to have some tax diversity since we never really know what's going to happen with taxes over the coming years.

So basically, really long answer short, no, you probalby can't do that, but you can ask your provider just to make sure. While you're asking, you might also approach them about starting up a Roth 401k which would offer you the best of both worlds.

If you need info on lobbying for that, I wrote a post about it that I can give you a link to.

Good luck!


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PostPosted: Wed Jun 20, 2007 2:54 pm 
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Hey Mandy!

Please go ahead and toss up the link for the Roth 401k. I'm not very happy with our company's 401k options, but it's not like we've got a ton of choice. So any advice in helping change their mind would be greatly appreciated.

Thanks also for the input on the rollover question. I'll check into to see what's available for us. Fortunately (or unfortunately I guess!) I'm not dealing with huge amounts of money. I think I've got something like $35k in the 401k now and I make much less than 100k per year. :(

Oh yeah, and one other dumb question: My 401k contributions have no impact on the Roth limits, right?


Last edited by Covert7 on Wed Jun 20, 2007 3:04 pm, edited 1 time in total.

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PostPosted: Wed Jun 20, 2007 3:02 pm 
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Here's the article: http://www.personalfinance101.org/Articles/2007/04/take-control-of-employer-retirement-plan.html

If you have specific questions, let me know and I'll be happy to help.

$35k is a huge chunk (more than most boomers have) and the average US salary is about $42k so you're not alone in making less than $100.

You've gotta work with what you have and it sounds like you are...that's all that counts.

ETA - your 401k contribs have nothing to do with your Roth contribs.


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PostPosted: Wed Jun 20, 2007 5:30 pm 
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I *think* that the driect rollover/ceonversion to the Roth starts in 2008, but I may be mistaken. 2010 is definitely when the income limits for Roth conversions go away, though.

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PostPosted: Wed Jun 20, 2007 11:03 pm 
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nickel wrote:
I *think* that the driect rollover/ceonversion to the Roth starts in 2008, but I may be mistaken. 2010 is definitely when the income limits for Roth conversions go away, though.


You might be right. I was having an internal debate when I typed it.


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PostPosted: Thu Jun 21, 2007 6:20 am 
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Ask your employer/HR contact if your 401(k) plan allows for non-hardship, in-service distributions. If they can’t answer that or don’t know, ask for a copy of the “Plan Document” for your 401(K) from the plan’s administrator in PDF. Then search for the words “non-hardship,” “in-service,” and “distribution,” and read around what you find to see what your options may be. I’ve found that more and more plans are including such a provision, especially in plans at very large companies.


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PostPosted: Thu Jun 21, 2007 8:27 am 
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Thanks for this info guys! I'd love to take a big chunk of that money and put it in the Roth.

But if I can do that I would still have to deal with paying taxes on it. Now in that CR article it mentioned that I could use money from the 401k funds (the money I would roll) to pay for the tax. So in that sense, I wouldn't be hit in my current pocket book with a huge tax bill. Mandy you indicated that perhaps rolling this money could have the potential to pop me into a higher tax bracket. I'm assuming that would be a temporary thing of course. But even if I moved over the whole ~$30k I don't think that would move my tax bracket.

My current bracket is 25% which I think ranges from $63k through $128k for 2007 tax rates. I believe our take home gross for both of us combined is maybe a little over $62k. So if this is the case, I don't need to worry about being pushed up tax wise, correct?

And regarding the 2008 thing, are you guys saying that in 2008 an inservice roll is permissible by law or that I can't do any type of rollover to a Roth (inservice or out) until 2008?


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PostPosted: Thu Jun 21, 2007 8:41 am 
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Covert7 wrote:
Thanks for this info guys! I'd love to take a big chunk of that money and put it in the Roth.

But if I can do that I would still have to deal with paying taxes on it. Now in that CR article it mentioned that I could use money from the 401k funds (the money I would roll) to pay for the tax. So in that sense, I wouldn't be hit in my current pocket book with a huge tax bill. Mandy you indicated that perhaps rolling this money could have the potential to pop me into a higher tax bracket. I'm assuming that would be a temporary thing of course. But even if I moved over the whole ~$30k I don't think that would move my tax bracket.

My current bracket is 25% which I think ranges from $63k through $128k for 2007 tax rates. I believe our take home gross for both of us combined is maybe a little over $62k. So if this is the case, I don't need to worry about being pushed up tax wise, correct?

And regarding the 2008 thing, are you guys saying that in 2008 an inservice roll is permissible by law or that I can't do any type of rollover to a Roth (inservice or out) until 2008?


It would be a REALLY BAD IDEA use the money that's in the account to pay the taxes. You will never be able to replace that money and it could cost you about $10k (state and fed) which would be a LOT more in 30-40 years. I am also not sure whether, if you use it instead of rolling it, you will have to pay penalties on that money. If you can't afford to pay the taxes now, either don't convert it now or, roll it to a rollover IRA and convert it a little at a time. If you do $10k/year you can adjust your paycheck withholdings to cover the $3k or so that you'd have to pay in taxes so it's spread out and you don't even hardly feel it.

I don't know the tax brackets but if you make $62 and a new tax bracket starts at $63, then yes you will be put into a new bracket and this entire amount will be taxed at a higher rate. However if that was a typo and you are already within that bracket then you're fine.

Regarding 2008, the only thing that is changing is that you can roll from a 401k DIRECTLY to a Roth. Currently, you have to roll to a rollover and then convert to a Roth. In 2008 that middle step goes away. Other than that it doesn't impact your current situation.


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PostPosted: Thu Jun 21, 2007 8:44 am 

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As always, check your specific plan. I believe the laws lately have been changed to allow some amount of in-service 401K withdrawals/rollovers. However, all plans instituted before this law change still follow the old rules and it costs $$ & headache to refile the paperwork to comply with new laws.

And no, that 2008/2010 deal only applies to money that is already in your IRA to be converted to a Roth.


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PostPosted: Thu Jun 21, 2007 8:45 am 
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MossySF wrote:
And no, that 2008/2010 deal only applies to money that is already in your IRA to be converted to a Roth.


I don't think this is right. It is for 401k -> Roth IRA conversions. Nothing changes if the money is already in a TIRA or Rollover IRA and you want to convert it.


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PostPosted: Thu Jun 21, 2007 8:48 am 
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2008 - Go from 401K to Roth (still subject to income limitations, I believe)

2010 - Convert Trad IRas to Roth IRA, bye-bye limitations.


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PostPosted: Thu Jun 21, 2007 8:59 am 
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pf101 wrote:
It would be a REALLY BAD IDEA use the money that's in the account to pay the taxes. You will never be able to replace that money and it could cost you about $10k (state and fed) which would be a LOT more in 30-40 years. I am also not sure whether, if you use it instead of rolling it, you will have to pay penalties on that money. If you can't afford to pay the taxes now, either don't convert it now or, roll it to a rollover IRA and convert it a little at a time. If you do $10k/year you can adjust your paycheck withholdings to cover the $3k or so that you'd have to pay in taxes so it's spread out and you don't even hardly feel it.

I don't know the tax brackets but if you make $62 and a new tax bracket starts at $63, then yes you will be put into a new bracket and this entire amount will be taxed at a higher rate. However if that was a typo and you are already within that bracket then you're fine.

Regarding 2008, the only thing that is changing is that you can roll from a 401k DIRECTLY to a Roth. Currently, you have to roll to a rollover and then convert to a Roth. In 2008 that middle step goes away. Other than that it doesn't impact your current situation.


Man, I suck at math. Yes you're right on the tax bracket thing. If I'm that close to the next level, pulling funds out of the 401k would push me up. Duh!

And I think I follow you on the not using the 401k funds to pay the tax hit in converting to Roth. You're basically saying it's better to pay my taxes out of pocket so I can keep more cash invested in the Roth or 401k. And it looks like waiting till 08 is a good idea so I can skip the rollover IRA step and just go straight to Roth. Of course all of this is predicated on the whole question of if I'll even be allowed to do this inservice.

And Dylan, you're basically saying that in 08 I could roll to Roth, but still be limited to a $5k contribution, right? (2008 Roth limits are $5k I believe.) And in 2010 I could theoretically put the whole 401k funds into a Roth without worrying about a contribution limit. Am I on the right track here or has my math train left the rails and blown up?


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PostPosted: Thu Jun 21, 2007 9:27 am 
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Covert7 wrote:
And Dylan, you're basically saying that in 08 I could roll to Roth, but still be limited to a $5k contribution, right? (2008 Roth limits are $5k I believe.) And in 2010 I could theoretically put the whole 401k funds into a Roth without worrying about a contribution limit. Am I on the right track here or has my math train left the rails and blown up?


A rollover has no impact on your contribution limit. What Dylan was referring to is that there is currently an income cap in place that says that if you make over $100k/year you cannot convert from a traditional/rollover IRA to a Roth. That income cap is being removed in 2010.


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PostPosted: Thu Jul 12, 2007 9:19 am 

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So in summary, would I be able to start a roth ira independently, contribute as much as i can, and then roll whatever employer contributions i have in a 401k into the roth whenever i switch jobs?

so at the end of each job, i roll whatever they contributed to the 401k into my roth (where i've been contributing my side), and move on?


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