Should I Roll My Traditional 401(k) to a Roth?
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- เผยแพร่เมื่อ 21 ส.ค. 2024
- Should I Roll My Traditional 401(k) to a Roth?
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Roth conversions should be carefully considered and planned for. Dave really shouldn’t be giving tax advice without issuing a disclaimer that he isn’t a licensed tax accountant. This off the cuff advice can be dangerous if taken without consulting with a professional.
I completed agree. He could have lost them tons of money especially if they do it all at once. I’ve thought of personally doing this in small increments.
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@@lolitashaniel2342😊
2:50 Very important detail in paying the taxes on the converted portion of the traditional IRA conversion. Pay the taxes from other sources other than the roll over itself, so you will get the full amount working for you. If possible, pay the roll over taxes from funds that are not already in the market!!!
I'm a beginner I know it's a work around, I need someone to enlighten me with this so I can do it too
A $700,000 conversion would get taxed mostly at a 37% rate! They probably show spread the conversion out over several years. Their CPA needs to game it to see what the best numbers are per year and where to get the money to pay this huge tax bill. For example, if they are making $300,000 combined, a $140,000 conversion would keep them at the 32% tax rate. The next $200,000 gets taxed at 35%. I'm thinking they would prefer to save and convert over several years.
That was my thought exactly also, who knows what the market will do over the next several years.
If you have the cash available to pay the taxes you can do an in-plan conversion. My plan is to do incremental in plan conversions each year to maximize my tax bracket thus locking in my current lower tax bracket while I can. I anticipate the tax rates to jump 3% in 3 years when the trump tax cuts expire.
Pray that a republican gets back into office to keep our taxes low ...
The calculation is simple. Do you want to pay taxes at your current tax bracket or defer the taxes to the future. You might be in a lower tax bracket when you retire but the federal government might raise the incomes tax rate.
If they raise the tax rate you can get grandfathered to the old rate if it was lower.
@@muffemodabsolutely false.
Very simple explanation thank you
It’s kinda a hard to believe the government won’t raise the tax rate. That’s for sure! 😅
You din’t know your deductions in the future. This is really a question for your tax accountant.
Dang. Baby step 7 at 32 at 2M+ net worth? Killing it.
think she and her husband are both engineers, so both prob have been maxing 401 k since they were 22.
@@kuryanthomas1438yes, and they’ll obviously not qualify for the Roth based on income, even after adjustments.
When she said 400 and 700 I thought she meant dollars! 😂
We all start the race at different places. I know someone that inherited $1M and a nice big house at 19 and had not spent any of that (all invested) by age 40. I know someone else who inherited $3M at age 68 who was living on social security and a small pension up until then.
Concept: right now she is probably in a 24% federal tax bracket so that's what she will owe federally if she rolls. Let's say in retirement they use 100k of Roth in a year, now their federal tax bracket is 10% because technically they had zero taxable income. Why not leave some in traditional so you can pay taxes later since 10% federal taxes < 24%. You just cut your retirement by a net 14% by rolling everything
24% tax on $700k now is less than 10% tax on the $5.6M that this will grow into 28 years from now. If the caller was closer to retirement I might agree with your strategy though, but if she plans on having taxable income for the next few decades it might be better to grow tax free.
I highly doubt she will be in the 10% tax bracket when she retires.
@@Lon1001 your math took into account taxes on traditional but you forgot you will also have nearly twice the account balance of compound interest because you don't have to sacrifice the 300k this year. Run your numbers again with Roth starting with 400k vs traditional starting with 700k. Only different in the end is the tax bracket
@@staceystrukel1917 what makes you say that? I'm just going by current brackets but you could withdraw a million dollars from a Roth in retirement and that's still 0 dollars taxable income, you already paid the taxes
@@Gibb591 Trump's jobs & tax cut act expires in 2025. Taxes are going UP soon enough. Most people don't know this.
You can always just stop contributing to the traditional 401k & start investing into the Roth 401k.
If they offer it that's why Dave said he doesn't know if that's an option
problem - yearly limit fo0r Roth is $6500
@@RandJ1996 IRA is $6,500 ($7,500 if you are 50 or older)
401k is $22,500 ($30,000 if you are 50 or older)
I would only do small amounts each year to make sure I could afford the taxes. I did it myself but didn’t have a huge IRA when I rolled into a Roth.
I wouldn't roll it all at the same time. Move a little each year to keep the taxes down.
I’m 35 and have 20 dollars in a savings account
You'll be okay as long as you don't put all your _huevos_ in one basket
That's a good start.
Can I have 5?
Don't you worry about a thing Joe Biden and Kamala Harris are going to take care of everything for you. You might as well just retire now
It's better than 0 dollars.
She just called to flaunt
A lot of companies don't let you do that. If she is in the highest bracket, it may not be an issue to have more taxable income. With that said, I think the conversion can come before paying off your mortgage, especially if your interest rate is 3% or so. It all depends on numerous factors.
$2M net worth. Stop being cheap and hire a licensed tax professional. Roth is only good if they are younger (she is at 32), but if they are at a higher tax bracket now, it’s a bad idea (losing the deferred tax benefit now) as they should have a lower tax bracket they can control when they retire, unlike the income they get from an employer.
Exactly. 💯 agree.
If time is not of the essence, how come she wouldn't wait until the there's a significant market correction or bear market? Decline in pre-conversion dollars = less amount of taxes owed.
With a $2M net worth, it probably doesn't matter and I'm just being cheap for asking.
Yes.
Dave is probably wrong on this one because ERISA rules are strict. Rolling it into a roth 401k is a taxable conversion, so she needs to roll it over to a rollover IRA, then convert it to a roth IRA herself. A 401k plan is not going to be responsible for doing this and will likely not take the risk of doing this.
Dave, please STOP giving people tax advice unless you get licensed as a tax professional first or just tell people to see their accountants. The IRS is enforcement minded lately and they are not playing around.
I rolled a portion of my traditional 401k into ROTH 401k within the same plan. Yes, it is possible
@@dfarmer_ You just made my point. It has to go to traditional 401k first, then converted to a Roth 401k. It's a taxable conversion though
@@Jim_Curtis Traditional to ROTH is taxable. However, it does not need to go out to an IRA first. It's called an in-plan conversion.
@@dfarmer_ Good to know. Guess they just skip a step, but it's still a taxable event that should be considered beforehand.
Dave literally said it was taxable and gave an example where she pays 300K in taxes.
Unreal..1 million in 401 k and they are only 32. And have a home paid for and no debt? ??
It’s possible. I’m 49…same thing. Most of my peers say/think it’s impossible when it actually is and I only have a diploma.
It's NOT impossible. I am an immigrant, and most all my friends paid up their 300k+ homes in 5 years. 😂
Sorry Dave, every company has their own rules on what can and can't be done in their 401k. 401k rules allow for roths, but plans are not required to offer them.
They do if Dave Ramsey said
This is my understanding regarding "in-plan roth conversions". While I am 40 years older that the caller with DR, I have learned that roth contributions are good, but roth conversions can be very good, if you have the funds to pay the income taxes generated. Being debt free and receiving an inheritance, I could convert $80k and keep my federal tax rate at 15%. Back to the company rules, my adult children have 401k with a roth 401k option. I have asked if an in-plan conversion is possible and I could help with a cash gift to pay for the increased taxes. Again I would keep the conversions low, like in the $10-20k range initially. If one does not have the funds to pay the taxes, they are best off holding off on any roth conversions.
If they have the option to use a roth 401k they should start there and slowly convert the other for max tax advantage. This couple is on pace to have well over $20 million and rmds north of $600,000/year which will trigger $150,000 in taxes per year. Coverting the $700,000 in one shot would be the worst way, but that $300,000 tax bill is one time and only equal to 2 years of taxes on the future rmds. For most people this doesnt matter if they have $1-2 million, but if you are a mega saver with a 401k of $10,20,30 million using the roth will save millions in taxes.
Why put money into retirement at this point... I think she need to put everything into Roth 401k and IRA. Else she/they are going to pay more taxes when they retired vs the tax rate they have now... Why put away money that you can't touch until you are 65 and you will pay more taxes on... Real estate investment is nice.
Bingo
Great Video! Thanks 👍😎
Don't do this all at once! Chunk it across various tax years to offset taxes. Consult a pro first.
My CPA was a big help, but it was my research that knew about how much I wanted to convert. The CPA figured the necessary estimated taxes and even printed up the forms and address labels to mail my payments with. If I was a bit off, I would tell my CPA that I desired to not exceed a certain tax percentage. Know prior how you're going to pay the taxes and avoid having the taxes withheld out of the conversion. Not all CPA's and estate planning attorneys are super knowledgeable about Roth benefits, so you might review their training to know if they'd be a good fit.
The baby steps are easier when you are rich.
So when you roll a 401K into a Roth you have to pay the taxes with outside funds or else you will get double dinged because your technically taking money out?
Correct. For example I rolled my 403b that only had 13k in it and will owe like 5k in taxes in the 2022 tax season
I don't understand. Why would the caller want to roll over to a ROTH? She's better off letting that money accrue untaxed due to her being a high earner.
I agree
no because in the end she'll end up paying more than 300k on the future gains than if she pays it today
@@webfreakz you pay taxes either way. Only difference is now you are paying higher taxes than you would in retirement since her taxable income will be less in retirement
@@Gibb591 potentially their portfolio could grow into the millions. Then the total taxes paid would be more than the onetime 300k today.
@@webfreakz You're right on the money. Assuming that you will be in a lower tax-bracket is not a good assumption to make.
lol I would check tax laws you can’t use that traditional for paying taxes without penalty unless 591/2 and you can’t touch that money for 5 years no matter what age. And you do not want to do it all at one, your marginal tax rate will be insane and unnecessary
I do not believe he had enough information to make this decision, you need to know what they earn a year and their potential tax bracket in retirement. why would you pay 32+% now when you could possibly pay 22% later
Idk why she would want to do this…
Good grief, I hate financial "advice" such as this. The correct answer is "you need to sit down with a CPA or financial advisor who can provide examples of different scenarios so you can make an informed decision." There is no "one size fits all" here. Personally, unless I had an existing relationship with a CPA / FA that I trusted, I would talk with three or four and see if they gave me the same advice.
They will not give you the same advice, most likely.
i think this is the one but can anyone confirm this is the engineer who called in recently to do her debt free scream where she and her husband are both engineers?
Great advice and good to know
These comments are funny. Dave always say don’t take money advice from broke people.
I put $300 a check into my deferred comp. $200 pretax and $100 Roth. Should I be putting it all in Roth?
Yes.
hello, where to watch the show, is it live on youtube or where? thanks
One of the issues with rolling any 401k into an IRA is you lose out on the Rule of 55, which lets you use your current 401k if you leave that employer at age 55 or later. So it provides an option for early retirement without withdrawal penalty. But it you roll 401k -> IRA, you lost that. So you should explore 401k -> 401k rollover.
As in, a once in a lifetime 401k->IRA = never allowed to tap 401k early? Even if starting a new 401k later?
@@sloth6765 If you want to use the rule of 55, you should be rolling old 401ks and standard IRAs into your new 401k. Granted, it's not like you need to roll them ALL, since you only need about 4-5 years of expenses between 55 and 59 1/2, when you can access it all. Although having access to it all means you can transfer out of 401K at 55 into a IRA and slowly execute Roth conversions.
As a Banker I don’t necessarily agree with this advice due to this couple obviously being a very high income household but it’s their life so whatever. If it were me I would probably just keep buying mutual funds and front load a 529.
Where do you bank?
At your moms
@@MrOfficer235 nice
I would not do the 529. That is the first money colleges will take. Better to keep it in the parents name.
What should I do with my 401k if I don’t work for the company any more and I don’t have a job yet???
Rollover IRA
@@fauxbro1983 do I have to go to a bank to do that?
@@sohd2283 Join a Vanguard, Fidelity etc...to rollover. Never take a check in your name, if you do you will pay ALL the taxes.
@@veritas3179 wow thanks didn’t know that! Appreciate everyone I’m 19 and don’t know much but trying to learn! :)
@Mikk Z how do I keep tabs on it do I need to call someone?
Can u have 401k and do the Roth IRA at the same time ?
Q1 Yes
If I don’t roll my traditional to a Roth. How much tax will I be paying every time I take out after of course I turn 60 years old
It depends on how much you take out. As you take more out, you move into higher tax brackets. And once you hit age 73, you will have required minimum distributions. There is a calculation each year based on the balance at the end of the previous year. That only applies to Traditional accounts, not Roth.
I invest in dividends for passive income. I love dividends and teaching younger people how to invest.
What is Dave saying? How does the $300k in taxes get paid? From "somewhere else".... huh?
Well you have to have the money to pay the taxes or else it doesn't make sense to do it.
@@ClaxtonBay123 that's what i thought
A rational person would structure the rollover to minimize taxes by conducting it over several years, maxing out the 24% tax bracket and not rolling over any more in a given year that would put them into the 32% tax bracket. I assume with them being married filing jointly with a large net worth at a young age, they may be in the 32% or 35% range already, so it's really a scenario that a financial adviser needs to analyze in greater depth than a 3 minute phone call.
@@marclamb5972 This. I'm pretty sure Dave doesn't really understand how Roth works from how he talks about it.
Sounds like that guy.
Dave, after I rolled my 401k to a Trad. IRA (I'm retired , 71 YO), and Invest the IRA funds into a T-Bills (for example), can I put that investment return (INTEREST on bonds, T-Bills , etc) into a newly formed ROTH IRA ? Are there immediate and/or tax benefits to do this?
You have to have reportable earned income to put money in an IRA of any type. You could roll your Traditional IRA over to a Roth IRA.
The most common forms of earned income are compensation earned from working for an employer or net earnings made by someone who is self-employed. Other income sources that can be used to fund a Roth IRA include:
- Taxable alimony or other maintenance received under a divorce decree
- Nontaxable combat pay
- Certain taxable non-tuition and stipend payments
Compensation doesn't include earnings from rental property or other real estate holdings. It doesn't include pension or annuity income, deferred compensation, or income from a partnership in which you don't provide income-producing services.
Investing in a Roth account at your age doesn't do much for you. Roth accounts don't have required minimum distributions, so that money can sit there until you really need it. But the idea is that you put the money in there and give it time to grow, and then all that growth comes out tax-free. At 10% return, your money doubles every 7.2 years. But again, you have to have earned income to put money in a retirement account. They are really intended for people who have years left in their career. If you roll your Traditional IRA over to a Roth IRA, you create a tax event. You will have to report and pay taxes on whatever you roll over. If you can't let it sit and grow for at least ten years, it is probably not worth the hassle and taxes.
This is terrible advice. Anyone with this kind of money at stack should be consulting a professional
So key is don’t do this unless you are on baby step 7, got it! At least 7 more years for me, God willing!
how can someone have $400k in a 401k at 32 years old ? is it even possible ? sorry - I am not getting it - can someone please explain ? thanks.
Make max or near max contributions for 10 years.
She could springboard to baby-step eight by divorcing, living off as much of the child support and alimony as possible and then investing the rest in Mutual Funds
What good is your retirement savings account on IRA or 401k if you money there is loosing its value at the rate of the dollar is doing right now $30 trillion in debt and being dump by other countries like Russia and China or maybe loosing the status as the world reserve currency?
Cash savings loses value over time due to inflation. Stocks will generally keep up with inflation and over time generally exceed it. NVIDIA has grown 1100%, far exceeding inflation, as one example (granted, kinda extreme)
Is there a 501k?
Dave's favorite
@@Youknowwhoin2024 Yes, it's like turning your amplifiers up to 11 which is one more right?
🤯
Horrendous advice. She and her husband are clearly high income earners and Dave is recommending a Roth when traditional is far superior especially for her situation. What a joke
i think it depends how you plan to use your retirement account. it's one thing if you use the retirement account to pay the bills. it's another if you plan to save for major spending (another house, boat, etc) without the government hands in the cookie jar, again. in my opinion, the tax free gains always outweight the current progressive taxes
@@Monday2007 The only thing that matters is tax rate now versus tax rate in retirement. Traditional 401k saves you your marginal tax rate, which is the highest tax bracket you fall into, while being taxed at your effective tax rate later, which is almost always lower than the marginal tax rate. The caller is clearly a high income earner and is likely already in the 32% or greater tax bracket. They'd be better served continuing to contribute to their traditional and investing the tax savings in a brokerage account. Doing this will result in them having more money than solely going 100% Roth even after paying taxes in retirement
@@pey7777 With a potential, extremely high, multi- million dollar,, tax deferred 401k balance and RMD in the future, which could easily put you in the higher tax bracket, i don't see the benefit....and, earnings in a separate brokerage account to be taxed again.
@@Monday2007 You're missing the part where you can choose to convert all or part of your 401k into Roth at any time after separation from your employer. It's not a choice of "convert all to Roth now or keep it all traditional forever." Proper retirement planning includes considering partial rollovers of traditional funds into Roth when it makes sense to do so. Doing this all at once like Dave is suggesting while they're working and making high incomes makes no sense. Having multiple tax buckets in retirement (traditional, Roth and normal brokerage) gives you options for manipulating how much in taxes you pay in any given year and that gets taken away if you focus too heavily on one type of tax advantaged account
@@pey7777 right right...I'd never do a lump sum conversion! But, it's advantageous to have money in multiple accounts and not have everything in one "basket."
I'm actually tired of worrying about stocks. it's driving me nuts these days,I think crypto investment is far better than stock made over $39k in a week….
Stocks are good but crypto is more profitable. Not to be compared.
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