Ed Slott IRA rollover question.

Submitted by Larry Olin on Fri, 2016-02-05 21:58

I currently have a client looking to rollover his 401k now. He has both a pre-tax traditional 401k contributions and Roth 401k contributions in his plan. The current idea is to rollover his 401k into two IRA’s. One Traditional Rollover IRA account and one Roth IRA rollover account. Client mentioned that he might want to do a Roth conversion of his pre-tax contribution in his 401k as well this year.

1) Wouldn’t it be better for the client to just do the 401k Roth conversion at the time of the rollover? If he makes too much in the current year outside of the Roth conversion, can he re-characterize it into a Traditional IRA rollover account?
2) What penalties would he need to be concerned about, if any?

The client is 35yrs old and earned $400k in 2015. Anticipates a lower income year this year (2016) of about $120k.

Thank you,

Brian G. Mague
Vice President – Investments

The Olin Financial Group
of Wells Fargo Advisors

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Permalink Submitted by Alan - IRA critic on Fri, 2016-02-05 23:30

Client can either convert directly to a Roth IRA from the 401k plan or do a direct rollover to a TIRA and then convert from the TIRA. Either way, these conversions can be recharacterized if desired. This must be a prior employer 401k because he is likely allowed either none or very limited amounts rolled out of a current 401k. Another factor is whether he has any after tax contributions in the 401k or non deductible contributions in his TIRA if he has a TIRA. It is more efficient to move the after tax amounts to a Roth first and there are ways to do that. In any event the key to converting too much pre tax money to a Roth IRA is not to do so if his current tax rate is higher than what he expects in retirement.
There are no penalties to convert or to recharacterize a conversion. If 2016 will be a lower income year than years after 2015, it is probably a good opportunity to convert more in 2016 since his tax rate for conversions will be lower then.