Need Help

[Lauri D]

Ok husband was notified on March 28 that company he has been with for 27 years was sold. New company takes over April 1. Heres his Question he has a 401 with about $130,000. he wants to roll it over to a roth IRA or would it be smarter to just roll over into new company 401? What kind of penalties are involved he is 47.

[kork13]

First of all, make sure that he would even be eligible to roll over his 401k. Typically you can only do that once you have left your current job....I'm not sure how those rules change (if at all) based on your employer being sold. As long as he's eligible to do so, there won't be any penalties involved as long as the money goes straight from the 401k to the rollover IRA.

Assuming that he WILL be eligible to roll over, consider taxes. If you try to roll over $130,000 into a Roth IRA all at once, you're going to owe taxes on that entire $130k come next tax season (the IRS considers a rollover the same as earned income). Doing that will likely spike your AGI and push you into a MUCH higher tax bracket, and leave you with a massive tax bill.

My recommendation would be to roll it over to a Traditional IRA (a.k.a. "deductible IRA"). That way you won't owe taxes on everything all at once. If you want to move it into a Roth IRA, do it slowly over the course of years. You don't want to get hit with a huge tax bill all at once. If you can think through the tax planning side of it, you should try to do this: In any particular year, roll over money from the Traditional IRA to the Roth IRA only up to the point that it bumps you up into the next higher tax bracket. Depending on your income, that might be just $5k-$10k/yr, or it might be $40k/yr. That way, you won't have to lose too much money to taxes, and you'll still (eventually) get it moved into the Roth IRA like you want it.

[jpg7n16]

There are no penalties to roll it over. There would be a pretty big tax hit to convert it to a Roth.

Going from pretax to pretax (401k to new 401k; or 401k to Rollover IRA) is not a taxable event.


Converting a 401k to a Roth is a taxable event. And you guys would have to pay tax on an additional $130,000 of income. Assuming that puts you in a higher bracket, which it almost certainly will, you'd be in either the 28% or 33% brackets (plus state tax). So you would need to come up with somewhere between $36,400 and $42,900 (plus state tax) to convert it all to a Roth.


I'd likely roll it to a Rollover IRA, or to the new plan if you like the investing options and they allow roll-ins.

[Lauri D]

Yes he is eligible to roll it over. He has to do something as the company has been bough out. As we know he can either roll it over into new company that bought it out but he has to do something VERY soon. We just didnt know what was best way to go.

[kv968]

Yes he is eligible to roll it over. He has to do something as the company has been bough out. As we know he can either roll it over into new company that bought it out but he has to do something VERY soon. We just didnt know what was best way to go.

As a rule of thumb, it's usually more advantageous to roll over the 401k into a rollover IRA with a fund family or broker (e.g. Vanguard, T. Rowe Price, Fidelity, Scottrade, etc...). The reasoning is your choices of investments are much greater than had you gone with the new company's 401k and in most cases it's cheaper. Check out the expense ratios of the funds available in the new 401k to ones in some of the fund families I've mentioned and see which is cheaper.

If you do decide to do a rollover and go with one of them all you have do is call and tell them you want to roll it over and they'll walk you through it and be more than happy to help you with the process. Just make sure you do a DIRECT rollover and not get a check from the old 401k. Although that should be taken care of when you speak to the fund company.

[maynard]

If you roll it over to a roth you will get a massive tax bill next year.

Why do you have to do something soon? Even if his company goes out of business, he wont lose his 401k. Its his money in an investment account. It doesnt dissappear even if his company does.

I would roll it over in to the new companys 401k plan, (which is different than a roth)