What prevents someone from rolling one's 401k into a Roth IRA every year? I am a sole proprietor (401k Solo) and I am the trustee of the fund. If someone needs to leave their company ordinarily to do this, I certainly can fire myself at the end of each year....
What prevents someone from rolling one's 401k into a Roth IRA every year?Taxes. Wby would you want to do this?FuskieThinking paying annual taxes on retirement kind of nullifies the benefits of tax deferred accounts...
FuskieFoo is thinking: << "What prevents someone from rolling one's 401k into a Roth IRA every year?"Taxes. Wby would you want to do this?FuskieThinking paying annual taxes on retirement kind of nullifies the benefits of tax deferred accounts... , >>However . . . . one would then have MORE money invested and not just on a "tax deferred basis", but on a tax FREE basis. It may be the usual issue of whether or not one is going to be in a higher or lower tax bracket when one retires and uses the money from that account.
What prevents someone from rolling one's 401k into a Roth IRA every year?I could be wrong but many 401(k) plans will not allow you to rollover your funds while you are still an active participant in the plan. If I remember back to the days when I had a 401(k), you could not transfer the funds until you had withdrawn from the plan or left the company.YMMVdt
You can not roll from a 401k directly into a ROTH. You must roll into a traditional IRA first then a ROTH, second, as Dsemmler points out, almost all 401ks do not allow for in service withdrawals. You must separate from service, reach the defined retirement age, or become disabled. ( a bit extreme to get a rollover)You can then roll the 401k to a traditional then convert the traditional to a ROTH. If you are years away from retirement, this is probably a good strategy. Remember, you will pay tax on any amount converted to the ROTH so you may want to do this systematically instead of a lum sum event.Bill
I'm a little baffled. I am a sole proprietor, and through a TPA (third party administrator) I run the 401k myself. (i.e.-401k solo, part of the 2001 tax changes) I make all the investment decisions. I make all the rules in the 401k. I'm the only person in my company who gets a 401k...I'm the only employee in my company. I am 36 years old. Who wouldn't want to have all of their money tax deferred and tax free(except for annual initial investment) with an upper limit of $40,000 rather than $3,000? All the benefits of a Roth, with 13x the amount of money to put in each year.My question, can it be done legally?
SpringChange:"All the benefits of a Roth" Your post implies you think the money you are contributing to your 401kwill never be taxed. This is not true. You get the tax break whenyou cotribute, but later (when you take distributions) all of it will betaxed as ordinary income. The money and all its growth that is con-tributed into a Roth is never taxed. Don't get me wrong, I contribute toa 401K myself, but I think for someone your age, a Roth is a great deal. Actually for any age a Roth is great to contribute to. However, rollingfunds from a traditional IRA into a Roth is not always the best decision. It depends upon your situation.Norm
OK, I'll try again.Roth IRA:-$3000 annual contribution-pay tax on $3000 that year-no tax again-X amount of dollars free and clear at retirementRolling Over 401k Each Year into Roth-$40,000 annual contribution-pay tax next year on this year's $40,000 401k contribution upon rollover into Roth-no tax again-13X amount of dollars free and clear at retirementI hope this explains things. Anyone have an answer?
Spring Change: In order to do that, you would have to close your 401k each year andstart a new different one. I am not sure you can do that. Actually I have been doing about what you are saying with a traditional IRA. When Iwent into business for myself, I rolled my company's plan into a traditional IRA that I already had. Back in 1998 when you were able to roll into a Roth and spread the taxes over 4 years, I rolled a large chunkof it into a Roth. The last few years I have been rolling the remainingmoney a peice at a time. I roll an amount equal to what I am contributing to my relatively new 401K. I am hoping to get a large block of money inmy Roth, as it it will sort of be my pension. I don't think you can rolla portion of an ACTIVE retirement plan into a Roth.Norm
-13X amount of dollars free and clear at retirementThis I am not seeing. Let's say you roll over your 401k each year into a TIRA. You will not be making a $40k contribution to your Roth. You will be making a $28k contribution after (for arguments sake) paying 30% in taxes when you convert your TIRA into a Roth. Now if you are extremely confident that your income in retirement will be so great as to bump you into a higher tax bracket, then you may be better off converting to the Roth. But that is not statistically likely.FuskieWho does not know if it is legal either, but kind of thinks it will get you audited if nothing else...
This I am not seeing. Let's say you roll over your 401k each year into a TIRA. You will not be making a $40k contribution to your Roth. You will be making a $28k contribution after (for arguments sake) paying 30% in taxes when you convert your TIRA into a Roth. Now if you are extremely confident that your income in retirement will be so great as to bump you into a higher tax bracket, then you may be better off converting to the Roth. But that is not statistically likely.There are other issues as well. As I understand it, you don't need to take any required distribution from a Roth IRA, which gives you a little more flexibility. You may be able to continue to compound more of your money for a longer period of time without worrying about taxes under a Roth IRA.Also, IMHO, there is more certainty regarding your future tax situation with a Roth IRA. I don't expect politicians to begin taxing distributions from a Roth IRA (although it is debateable, it just doesn't seem politically feasible), but there is little to stop them from raising tax rates. With Congress so willing to spend like crazy and put the government on the hook for massive liabilities (especially Medicare), an increase in tax rates is a very real possibility.So the Roth IRA, in my opinion, provides you with greater certainty, even if it *may* end up providing you with a lower after-tax return. I personally place a great deal of weight on certainty. As Warren Buffett said,“I would rather be certain of a good result than hopeful of a great one.”1996 Letter to Berkshire Hathaway shareholdershttp://www.berkshirehathaway.com/letters/1996.html
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