Ask the Hammer: Can I Roll My 403(b) Plan into My IRA?

Ask the Hammer: Can I Roll My 403(b) Plan into My IRA?

Ask Bob: Can I Roll a 401(k) to a Roth IRA?

A reader asks how to avoid a taxable event when moving their 401(k) from their current employer.
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Question

My wife has a 401(k) with Publix Supermarkets. Can she roll it over to a Roth? She plans to retire at the end of this year. Can it be done from trustee to trustee without any tax problems? Wanting to move so when she takes a distribution there won't be any tax problems.

Answer

As with many financial questions, the answer is - it depends, says Dennis Markway, CFP, president and founder of Iron Horse Wealth Management.

“It is certainly possible to move directly from a 401(k) plan and have the funds directly rolled over to a Roth IRA if that option is provided by your plan or the recordkeeper,” he says. Although not all recordkeepers allow for that distribution option. And keep in mind that with many recordkeepers and plans that conversion is an all or nothing proposition (if you are doing a conversion, it's with 100% of the funds).

The conversion from 401(k) to Roth IRA (unless the funds are Roth 401(k) funds) is taxable. “So, you will pay income taxes at the federal, state and local level depending upon your jurisdiction,” Markway says. “Depending upon your overall tax bracket based upon other income you may have, that may be an expensive proposition. However, based upon your perspective of what may happen to future tax rates, converting now when tax rates are at a historical low may be to your advantage . . . or maybe it isn't. It's always wise to talk to your tax professional to make sure the steps you take are in your best interest.”

As an alternative, it may be more beneficial to roll over the funds from the 401(k) to a traditional IRA. He explains, “From that traditional IRA, you could do partial conversions based upon the amount of taxes and the rate you want to pay and spread the tax liability out over different tax years. I've seen this work well for clients who have a drop in taxable income when they retire or have sufficient deductions that they can convert portions of their traditional IRA to a Roth IRA with paying little or no tax. So, the virtue of this approach is the control and flexibility you can craft into your overall plan.”

“Last but not least,” add Markway, “I would be remiss not to address the careful decision making you should make when rolling over proceeds from a company-sponsored retirement plan like a 401(k). Please make sure you compare and contrast the costs, benefits, services and support between your 401(k) and an IRA and make sure the steps you take are in your best interest and aligned with the services and support you need.”

Got questions? Get answers!

Email Robert.Powell@maven.io

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Question

My wife has a 401(k) with Publix Supermarkets. Can she roll it over to a Roth? She plans to retire at the end of this year. Can it be done from trustee to trustee without any tax problems? Wanting to move so when she takes a distribution there won't be any tax problems.

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