401K rollover to Roth IRA

[Scallywag]

Hello,

I am currently in need of advise on two counts. One is about a home purchase that is giving me a lot of anxiety and the other is about my old 401K at an old job that I had planned to "break into" for a down payment on the home eventually but something else happened in the meanwhile that I will ask about now.

A week ago, I received notice that a prior employer is going to roll over my old 401K (part of it is a Roth 401K) to Millennium Trust unless I "took action" immediately. I am assuming that they want me to roll it over to an IRA immediately as I am neither lost nor have I been unresponsive to them.

The 401K is at Fidelity. Yesterday, I opened a Roth IRA to receive the Roth 401K and a traditional IRA to receive the rest of the money both at Fidelity. Would this be ok ? Do I just have to call Fidelity to move the 401K account to the new IRA and Roth IRA ?

Secondly, I would like to move the money (100K in pre-tax) in the traditional IRA to the Roth IRA, but I am afraid of tax consequences on such a large sum of money. How do I avoid the taxes and move the money from traditional to a Roth IRA ?

Please advise.

[disneysteve]

The 401K is at Fidelity. Yesterday, I opened a Roth IRA to receive the Roth 401K and a traditional IRA to receive the rest of the money both at Fidelity. Would this be ok ? Do I just have to call Fidelity to move the 401K account to the new IRA and Roth IRA ?

Since both the 401K accounts and the new rollover IRAs are with the same company, I would imagine Fidelity would be able to handle all of the arrangements.

Secondly, I would like to move the money (100K in pre-tax) in the traditional IRA to the Roth IRA, but I am afraid of tax consequences on such a large sum of money. How do I avoid the taxes and move the money from traditional to a Roth IRA ?

You can't avoid the taxes. If you convert a traditional IRA to a Roth IRA, that is a taxable event. And you want to pay the taxes with outside funds, not draw from the IRA itself.

Keep in mind that you don't need to do the conversion all at once. I believe you can do a partial conversion each year for a few years if you don't have enough money sitting around to pay the taxes in the same year. Also keep in mind that the conversion affects your taxable income for the year in which you convert it so it can knock you into a higher tax bracket, especially if you're converting a large amount (like 100K).

This is definitely something that you should sit down and discuss with your accountant before pulling the trigger because if you do it wrong, it could end up costing you a lot of money in extra taxes.

[Like2Plan]

DisneySteve is spot on.

DH and I have done 3 rollovers with Fidelity and they are very efficient at getting the money moved.

Once you get the money moved you have time to figure the conversions out. As DS said, it would be a good idea to get some help. Here are some reasons why--Up until recently you could recharacterize your Roth conversions if they didn't work out favorably, but that has gone away with the latest tax law change--so you will be stuck with the consequences.
There are so many factors to consider: Your age, your tax bracket, the time you have had a Roth account open, how soon you want to access the money, medicare, NIIT, etc.

Roth conversions are something that I have been researching for DH and myself. I'm trying to smooth out our tax liability so that we don't get a big bump up in taxes when we turn 70.5 and RMDs kick in. So, every tax year I carefully track our income, expected tax liability and tax withholding--My plan for this year has already been changed because DH received an unexpected bonus and a raise. We have our plan in place, but we aren't going to do anything until the end of the year (just in case )

[Scallywag]

Thank you both so much.

Fidelity has moved the money into the Roth and traditional IRA, with no fuss / no headache. As Like2Plan suggested, I think I should wait until the end of the year as you stated to convert a portion of the traditional into the Roth so that I am accurate in calculating my tax bill for 2018.

We're in the middle of saving up for a home band that is giving me a lot of anxiety. Will make a separate post about it as I need some advise on down payment and how to shop for a purchase money loan.