I recently met with a client who had been advised to rollover and convert their entire 401(k) into a Roth IRA.
I asked the client how could this possibly be a good idea?
Here are the elements of the description that made the client consider this advice.
- generally speaking the client likes Roth IRAs
- generally speaking the advisor likes Roth IRAs
- the client had just retired and had their entire 401(k) sitting in a money market account earning next to nothing.
So without doing virtually any homework, when the advisor said they should convert to a Roth IRA it made some sense to them.
However, I hope from where you sit, you see the folly in this idea.
The 401(k) was with a little over $220,000 and the tax implications to the client would have been astronomical. Along with that, they would never have been able to redeem the wealth that was lost from paying all this tax upfront.
So what would make sense?
It is very important not only to know what tax bracket you are in, but also, where you are inside of that tax bracket. That way if you choose to convert a small and I mean very small portion of your IRA or 401(k) to a Roth IRA, who can most likely manage to stay in your current bracket rather than push yourself to the next.
Here’s what’s really important; see a tax advisor or see an advisor that will work with your tax accountant to run your specific numbers.
If you’re like most people, you worked really hard for your money and savings. Whether it be a 401(k) or a non-qualified account it took some effort and sacrifice. So insist on doing the homework that’s required to make a really good investment and wise tax decision.