Strategies for Moving 401(k) Money to a Roth IRA

I have a 401(k) plan with a previous employer that I have kept since I left that job. I am now 67 and plan to retire at age 70. Can I roll the 401(k) directly into a Roth IRA, or would it be smarter to roll it over to a traditional IRA first?

First, roll the whole 401(k) into a traditional IRA, which will give you more investment choices. Then think about what will happen to your income over the next few years as you decide when to convert some or all of the money to a Roth.

The Roth has a lot of benefits, especially if you don’t plan to tap the money for a while. Because you’re over age 59 ½, you can withdraw the converted amount tax- and penalty-free at any time, and earnings can be withdrawn tax-free, too, once the Roth has been open for at least five years. You’ll never have to take required distributions, and your heirs can inherit the Roth tax-free.

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But you will have to pay taxes on the money when you make the conversion. If your income will drop after you retire, then waiting to convert to a Roth IRA could reduce the tax bite. Converting the full 401(k) in one year, however, could still bump you up into a higher tax bracket even if you’re no longer working.

You might want to calculate how much you can convert each year without triggering a higher rate, and spread the conversion over a few years, recommends Rick Rodgers, a financial planner in Lancaster, Pa. Tax rates are scheduled to go up in January, unless Congress acts. “Converting some now would ensure that at least part of the Roth conversion would be taxed at today’s lower rates,” Rodgers says.