Transfer Retirement Funds to a Roth Ira

If you’re looking to grow your retirement savings tax-free, a Roth IRA is like a dream come true. However, if you’ve got multiple retirement accounts or you’re trying to figure out what you’re allowed to do here without causing yourself problems, it may be hard to find the info you need. While the transferring part is easy enough, understanding the impact after that happens can be tricky. Luckily, we’ve got you covered with everything you need to know about consolidating, transferring, and rolling over your funds into a Roth IRA while minimizing your upfront costs.

Steps

How do I initiate a transfer into a Roth IRA?

1. You contact the plan manager for an employer-based account. If you have an employer-based retirement account, like a SIMPLE IRA, 401(k), or 503(b), reach out to the plan administrator (usually an investment firm or brokerage) and ask them what you need to do to transfer the funds to your Roth IRA. They’ll walk you through the process and send the funds where they need to go.
   • You don’t actually handle the transferring part yourself. Your plan manager has to facilitate the movement of the funds.
2. Reach out to the brokerage customer service for individual accounts. If you’re rolling over an account that you opened outside of work, like a traditional IRA or self-directed 401(k), reach out the brokerage hosting the account. Either call or email their customer service (or your personal contact) and let them know you want to roll the funds over to your Roth IRA. They’ll guide you through it and send the funds where they need to go for you.
   • The brokerage sends the funds for you. Don’t take them out on your own and put them into a personal account to transfer them on your own. This is known as an indirect rollover, and it may trigger a large tax event. Let the pros handle this!

Can you transfer retirement funds to a Roth IRA?

1. Yes, there are relatively few restrictions when it comes to moving into a Roth IRA. It’s much harder to move from a Roth IRA to another account than it is to move from some other account to a Roth. Whether it’s a traditional IRA, 401(k), or some other kind of retirement account, you are almost always allowed to move your funds into a Roth IRA so long as haven’t rolled anything else over in the past 12 months.
   • Keep in mind, you must pay taxes on any funds you move into a Roth IRA, so you’re going to trigger a tax event here. Talk to an accountant if you’re rolling over a lot of funds and you’re worried about your ability to pay taxes on what you’re rolling over.
   • The tax rate for funds entering a Roth IRA is identical to whatever your income tax rate is.

Can anyone roll over into a Roth IRA?

1. Yes, but talk to an accountant first if you make more than $124,000 a year. You are not eligible to contribute to a Roth IRA if your yearly income is very high. You can roll an account over (known as a backdoor rollover), you just won’t be able to contribute once the funds are transferred. If you come in over the MAGI (modified adjusted gross income) threshold for a Roth account, you may not want to do this.
   • If you’re single, the threshold is $140,000 a year or more. If you’re married and filing jointly, it’s $208,000 a year or more.

Can I roll my 401(k) into a Roth IRA without penalty?

1. Yes, unless you do an indirect rollover. If you’re under the MAGI threshold, simply contact the 401(k) plan manager and explain you want to rollover the account to your Roth IRA for a direct rollover. There may be penalties if you do an indirect rollover, which is where you withdraw the 401(k) money yourself and move it to the Roth IRA on your own. You must have the 401(k) manager do this for you.
   • This is a very common request, and it shouldn’t be very difficult for your plan manager to do this.
   • You can only do this once a year. If you’ve rolled anything over to your Roth IRA already, talk to an accountant to make sure you’re allowed to do this.
   • This is the same process you’d use for a 401(k), 403(b), or 457(b) account.
2. While there aren’t any penalties, there will be a tax bill. With a traditional 401(k) or IRA, you pay taxes when you take the money out, but not when it’s going in. A Roth account is the opposite—you pay taxes when you put money in, but not when you take it out in retirement. As such, any money going in will be taxed at the same rate as your income tax.
   • In other words, if you make $40,000 a year and you’re moving $20,000 into a Roth IRA, you will be taxed on your income as if you made $60,000. However, you won’t be taxed when you withdraw from your Roth!

Can you convert 401(k) to Roth after retirement?

1. Yes, being retired doesn’t influence your ability to roll it over. Your retirement influences your ability to contribute to an IRA (of any kind), since you must have earned income to contribute to an IRA. However, that doesn’t stop you from rolling over an account, since that doesn’t technically qualify as a “yearly contribution.” Simply talk to your 401(k)’s plan manager and they’ll walk you through the process.
   • Keep in mind that you have to start withdrawing from your retirement accounts when you reach age 72. While you could roll over a 401(k) into a Roth after 72, it isn’t a good idea. You’d pay taxes, then be forced to start withdrawing the same year.
2. While you can do this, it’s not a good idea in all scenarios. The main benefit of a Roth account is that your money can grow tax-free over time. You don’t have that much time for the funds to grow after retirement, though. As a result, the only real benefit here is that you won’t pay taxes when you withdraw from the Roth IRA. However, you’re going to be paying a large tax bill if you’re converting a large amount of money. If you’re retired and you want to avoid a large tax bill, you may want to stick with the 401(k).
   • On top of this, you won’t be able to touch the money for 5 years. If you do take funds out of a Roth IRA before the account is 5 years old, you’ll pay a 10% penalty tax.

How Do I Roll Over a SIMPLE IRA to a Roth IRA?

1. Contact your brokerage to transfer the account if it’s two years old. You must stay with your SIMPLE IRA for at least two years before you’re allowed to move that money, so make sure that your SIMPLE IRA isn’t too new to do this first. So long as it’s old enough, just contact the brokerage holding your SIMPLE IRA, and ask them to transfer it to your Roth IRA.
   • A SIMPLE IRA stands for savings incentive match plan for employees. Employers often offer them instead of 401(k)s. If you have a SIMPLE IRA with a matching contribution from your employer, consider sticking with it. The free money from your employer is a pretty nice benefit of a SIMPLE IRA.

Should I convert my retirement accounts to a Roth?

1. You should convert any managed accounts if you want to be more hands-on. Most 401(k), 403(b), and 457(b) accounts are actively managed, which means that you don’t get to choose where the money is invested. If you want to have total control over where your money is invested, converting to a Roth IRA will give you total control over the allocations in your portfolio.
   • Remember, you pay expense fees for actively managed funds! While it isn’t a lot, those 1-2% fees can really add up, so self-managing your funds can save you money as well!
   • Some people don’t like managing their own investment portfolios. If you’re more comfortable leaving it to a pro, there’s nothing wrong with taking a more hands-off approach.
2. You should convert if you’re young or your priority is reducing taxes later. In most scenarios, it makes the most sense to rollover funds into a Roth IRA when you’re young. Yes, you may pay a small tax bill now, but you’ll have tons of time for that money to grow tax-free. In the end, it’s likely going to pay off. A Roth is also ideal if your goal is to minimize your taxes after retirement, as opposed to cutting your tax burden down now.
   • If you’re a low earner now but expect to make more money in the future, rolling over to a Roth IRA now is a good idea since your tax bracket is lower than it will be later on.
   • You probably don’t want to rollover a 401(k) if you’re still employed with the company offering it and they offer a matching contribution. That’s just free money for you. But if you leave a job and you have an old 401(k) with them, a Roth IRA is a great place for those funds!
3. You shouldn’t move funds into a Roth if you want to avoid taxes now. Rolling funds over into a Roth can carry a big up-front cost in taxes, since you pay taxes on anything going in (not when you’re taking money out). If you’ve got a high income but not a lot of liquid cash, and/or you want to minimize the taxes you pay this year specifically, it may be best to not move into a Roth IRA.
   • A lot of this is going to come down to personal preferences and your individual situation. If you aren’t sure whether this is the right move for you or not, talk to your accountant or meet with a financial planner.

How do I avoid taxes on a Roth IRA conversion?

1. Perform the conversion in a year where you don’t make a lot of money. Contributions and rollovers to a Roth IRA are taxed at your income level. If it’s a year where you were unemployed at any point, ran into a pay decrease, or you have a lot of large deductions on your taxes, it’s a great year to convert to a Roth. The tax rate increases the more money you make, so if you aren’t making a lot, the taxes won’t be as high.
   • Property taxes, interest on your mortgage, state taxes, medical expenses, and charitable contributions are all deductible. If you had an expensive surgery the past year, you paid a big property tax, and you donated a lot to charity, it’s a great year to move into a Roth IRA.
2. You can’t totally avoid the initial tax, but you’ll save a ton later! The Roth IRA is designed to make you pay up front. While the upfront tax bill can be a bit of a bummer now, remember that this is often preferable to paying the taxes later. The more time that passes and the more compounding interest you get from the holdings in your Roth, the more you’re saving in taxes!
   • To demonstrate this, imagine a starting deposit of $20,000 that grows to $60,000 over time. With a traditional IRA or 401(k), you pay taxes on the $60,000 when you take it out. With a Roth, you only pay taxes on that $20,000!

References

See also

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• Use Life Insurance in Your Retirement Planning
• Start a Retirement Home in Ontario
• Retire from a Job You Love
• Prepare for Early Retirement
• Prepare for Retirement in Your 20s
• Plan for Long Term Care
• Know if You Are Old Enough to Live in a Retirement Community

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