Convert 401k funds to a non-taxed IRA?

[nico08]

Hello:

I was half-listening to a financial talk show on AM radio in the care the other day. If I heard the host correctly, he indicated that there is a way to convert accrued money from a tax deferred 401K account into a non-taxed IRA account at retirement. I had never heard of such a product or process whereby one could achieve this result, from having to pay taxes on 401k distributions to not having to pay taxes on IRA based distributions. Is anyone familiar with this? If so, can you describe how it works?

The only thing I could find that was remotely close to this was the conversion of 401k funds to a single premium fixed annuity, but I believe in that scenario you are still paying taxes on the annuity payments received. Thank you for your advice.

 

[mathjak107]

you cant escape the taxes.. you can just do a conversion and pay the taxes...

whether you want to requires alot of number crunching.

 

[nico08]

So the choice is basically whether to pay a big tax big on the conversion from the 401k to an IRA account up front, or to pay taxes on the 401k distribution amount on an annual basis? I am assuming that if you convert from the 401k account to an IRA and pay a lump sum of taxes up front, then when you take any distribution on the IRA later, you are not paying taxes on the IRA distribution again, correct? What would be the motivation to pay a large tax bill early by converting the 401k assets to an IRA account?

 

[Alan]

So the choice is basically whether to pay a big tax big on the conversion from the 401k to an IRA account up front, or to pay taxes on the 401k distribution amount on an annual basis? I am assuming that if you convert from the 401k account to an IRA and pay the lump sum of taxes up front, then when you take any distribution on the IRA later, you are paying taxes on the IRA distribution again, correct? What would be the motivation to pay a large tax bill early by converting the 401k assets to an IRA account?

What I did was a direct rollover to an IRA. No taxes paid, new IRA has same tax deferred status as the 401k. I then converted ~$20k of it to a ROTH IRA and paid the taxes on the $20k. Each year I will convert some of the rollover to the ROTH, to do bit of tax diversificationand reduce eventual RMD's at 70.

 

[mathjak107]

thats most likely what they misunderstood to be tax free... its only moving the 401k into a tax defered account.

 

[Aeowyn]

You can roll a 401k to either a Traditional IRA or a Roth IRA.

If you roll to a Traditional IRA, no tax due when you roll, but taxed as you take it out just like your Traditional 401k.

If you roll to Roth IRA, you pay tax on the amount rolled, but from then on the money grows tax free instead of tax deferred.

There are some other Roth advantages such as no RMDs and if you wait 5 years after you convert, you can take contributions and conversions (not growth) before 60 with no tax/penalty.

The main reason you want to roll to IRA (which ever one works for you), is to have more control over the investments. Many 401ks have limited invstment options and many have high fees that may be hidden.

There are some 401ks that have lower fees than what you can get as an individual. If you are happy with your cuurent investments, you could leave there.

I plan to roll my 401k to Traditional IRA and then do partial coversions to Roth during low income years to max out 15% tax bracket (based on current tax system)

 

[DblDoc]

What I did was a direct rollover to an IRA. No taxes paid, new IRA has same tax deferred status as the 401k. I then converted ~$20k of it to a ROTH IRA and paid the taxes on the $20k. Each year I will convert some of the rollover to the ROTH, to do bit of tax diversificationand reduce eventual RMD's at 70.

I plan a similar strategy when I FIRE. Maximize tax strategies and minimize RMD's later.

DD

 

[mathjak107]

they totaly blew my plan out of the water last december when they did away with paying back ss later on .

my plan was to pay ss back ,get the whopper of a higher payment for my spouse and i and take all that nice negative income it leaves us with for a nice free roth conversion.

yep, un-known to most was the fact that when you payed ss back you could take either a tax credit for what you paid or an income deduction.

typically an amount like that would leave most with a negative income and nothing to do with it so it dies on the vine.

well if you waited until then to do a roth conversion your flying those empty seats and got it for free.

oh well its a dead loop hole now.