ROTH conversion
I client has the ability to take a in-service distribution of 70% of his 401k. We want to roll it over to an IRA and then convert it into a ROTH. The client doesn’t want to use his liquid cash to pay the taxes. We came up with the idea to take a loan from the existing balance of his 401k to pay the tax bill. He will just make payment over the next 5 years back to his 401k and keep his cash liquid. It there anything wrong with this idea I am missing.
Permalink Submitted by Alan - IRA critic on Tue, 2015-05-19 15:27
If he leaves his job for any reason, the loan will be fully due usually within 60 days. In addition, the amount of the loan will not be available to generate any earnings for the outstanding amount. Usually, it is better to just convert small amounts in a single year anyway to keep the tax rate on the conversions small. If the rate is higher than the expected tax rate in retirement, the conversion will not be beneficial.