Converting a 401k to a Roth?

[Katrina]

What are some tips to keep in mind if you're going to convert your 401k to a Roth?

 

[Cam]

The tax ramifications would be the big thing to keep in mind. My understanding is that it's treated as taxable income when you convert to a Roth.

 

[TechWiz18]

The tax ramifications would be the big thing to keep in mind. My understanding is that it's treated as taxable income when you convert to a Roth.

I was thinking the same thing it would suck but also I don't know if there would be instances where it would still be beneficial long term.

 

[prophet.]

I'm not a tax specialist but I do work in the brokerage industry and deal with IRA's and 401k's often. You're basically going from a pre-tax account to a post-tax account, which you'll have to pay taxes on the entire amount to do so. Each persons situation is a little bit different but the if you believe that you are going to be taxed at a lower rate during retirement (when you plan on pulling the funds out), a traditional ira MAY make more sense for you. A Roth IRA basically removes the fact that you'll be taxed during retirement and allows the funds to grow tax free, whereas a traditional IRA will allow the funds to grow tax deferred which means you'll then be taxed during retirement. There's also income limits on Roth IRA contributions, and you're only allowed to contribute $7,000 per year if under the age of 50 and $8,000 per year if you're above (for catch up purposes). The contribution limit is for both traditional and Roth. 401k's allow much more than that (around 3x). Each individual has different situations so if you're truly interested in which one is TRULY better for you would probably be better off talking to a CPA or tax specialist.

Investopedia has some great resources that you can also use to see which would be better:

https://www.investopedia.com/retirement/roth-vs-traditional-ira-which-is-right-for-you/

Must-Know Rules for Converting Your 401(k) to a Roth IRA

Learn how to convert your 401(k) to a Roth IRA, understand tax implications, MAGI effects, the five-year rule, and smart strategies to minimize your tax hit.

www.investopedia.com

Edit: I didn't mention this previously but traditional IRA's are also subject to RMD's (require minimum distributions), which means you'll be FORCED to take a distribution each year after the age of 73 (this changes all the time). Roth IRA's do not require that.