Can I convert a 401(k) to a Roth IRA?

Can I convert a 401(k) to a Roth IRA?

Before we look at whether you can convert a 401(k) to a Roth IRA, it is important to consider if a conversion to any type of Roth account is wise in the first place.

When you convert to a Roth account, usually all of the amount being converted becomes taxable income. In return, if handled correctly, you will pay no taxes on anything withdrawn from the Roth account. This “pay tax now so none is paid later” strategy will pay off if the tax rate that applies to the conversion is less than the rate you would have to pay when you withdraw money from the account. If you expect your tax rate to be lower when you withdraw money, a Roth conversion is unwise.

We can determine the rate that would apply to a conversion pretty easily but future rates are unknown. This means there is an element of risk. The more certain you are that your tax rates will be higher in the future or the lower your tax rate in the year of conversion, the less risk you have for converting.

It should also be noted that those seeking to convert a 401(k) to a Roth IRA or a Roth 401(k) should proceed with caution because the transaction can not be undone.

As the video describes, for some employees, an in-plan conversion is an option to convert a 401(k) to a Roth 401(k) account. If an in-plan conversion option is not available, converting a 401(k) to a Roth IRA is possible when the employee is eligible for a distribution from the 401(k). This typically happens upon separation from service or at age 59 1/2. Upon a distribution, Roth 401(k) balances and after-tax contribution accounts can transfer straight to a Roth IRA without taxation. Other types of 401(k) balances can be converted directly or indirectly with proper planning.


Making News…

We frequently produce Q&A columns for Florida Today and MarketWatch, a personal finance website of the Wall Street Journal, as well as pieces for a variety of other media. Below is a sampling from the last three months.

We continue to help the Orlando Sentinel with reader questions by participating in a free call-in hotline and its Ask An Expert feature. The latest hotline event was held on October 20th and was attended by Charlie Fitzgerald,CFP®Mike Salmon, CFP® and Tommy Lucas,CFP®.

Some links are accessible only to Sentinel subscribers but Derrick Chandler,CFP® helped a reader understand Medicare enrollment deadlines.  Mike explained how life insurance proceeds can be taxed. Because many taxpayers are finding they cannot itemize and are getting no tax benefit from their charitable donations, Tommy’s August 29th description of a couple of options to consider to obtain a tax break from charitable donations is timely. Tommy also explained how it is possible that someone with $75,000 in capital gains would not owe any taxes. Meanwhile, Charlie gave the run down on the basics of inheritance taxes for Florida residents. 

Dan Moisand,CFP® continues to write for MarketWatchFlorida Today, and Financial Advisor:

I’m nervous about putting my retirement savings in the stock market: Are indexed annuities a good substitute?

I’ve got questions about estate taxes and other inheritance issues

I inherited money. Should I invest it all at once? Or space it out?

Is a stop-loss order a good idea?

I’m 67 and 70% of my investments are in my company’s stock — should I sell it?

I need help to figure out the rate of return on my retirement accounts

An empty nester wonders: How do I get started saving for retirement?

Can I buy life insurance in my 401(k)?


In the News…

MFT Receives Prestigious National Award

MFT won the 2019 TRAILBLAZER IMPACT AWARDThis press release to national media hits some highlights but we will have more to say about this in our January newsletter. For now, know that we are very proud to have received the 2019 TRAILBLAZER IMPACT AWARD™ in recognition of over 20 years of efforts to improve the quality of advice, raise the bar for ethics standards, and advance the financial planning profession. The award is presented at the national conference of Schwab Advisor Services.

fee-only financial advisor OrlandoCongratulations to Mike Salmon, CFP® for his election to the Board of Directors of the Central Florida chapter of the Financial Planning Association. Mike is the fourth of our shareholders to serve on this board.


Things We Found of Note

2020 Retirement Plan Limits, Tax Rates, Tax Brackets, and Standard Deductions

The Internal Revenue Service (IRS) has announced cost-of-living adjustments for 2020. Here are a few highlights The 2020 limits are as follows:

  • 401(k) Deferral Limit – Increase from $19,000 to $19,500
  • 401(k) Catch-up Deferral Limit – Increase from $6,000 to $6,500
  • Defined Contribution Plan Maximum Annual Additions – Increase from $56,000 to $57,000 (or $63,500 with catch-up)
  • IRA Contribution Limit – No change. Remains $6,000
  • IRA Catch-up Contribution Limit – No change. Remains $1,000

For changes to limits affecting other plans see the IRS announcement of 2020 Limitation Adjustments

The IRS also released the 2020 Tax Tables and Brackets. The rates have not changed but the brackets have been adjusted for cost of living increases. The standard deduction is slightly higher. This summary hits the highlights.

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Moisand Fitzgerald Tamayo, LLC is an Orlando, Tampa and Melbourne, Florida based fee-only financial planner serving central Florida and clients across the country. Moisand Fitzgerald Tamayo, LLC specializes in providing objective financial planning, retirement planning, and investment management to help clients build, manage, grow, and protect their assets through all phases of one’s life and the many transitions in between. If you have any questions or would like to discuss anything further, please give us a call or send us a note. If you are not a client and wish to receive emails notifying you of new posts – no more than once per month – fill out the subscription information in the sidebar to the right. For more frequent updates, follow us on FacebookLinkedIn, or Twitter.  

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Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Moisand Fitzgerald Tamayo, LLC-“MFT”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. 

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About Dan Moisand

Dan Moisand is a fee-only financial advisor with Moisand Fitzgerald Tamayo, LLC. He is a regular contributor for multiple outlets, including Florida Today, MarketWatch, and The Wall Street Journal. His writing and financial advice have also been featured in Financial Planning, Investment Advisor, Wealth Manager/Advising Boomers, Forbes, Smart Money, and The New York Times, among other publications. He is the only two-time winner of the Journal of Financial Planning’s “Call for Papers” competition and has been named a top financial planner and advisor by multiple publications. Investment News named Dan one of the “twenty most influential men and women” in the history of financial planning. He currently serves on the Board of Directors for the CFP (Certified Financial Planner) Board.


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