401k Profit Sharing Plan

Submitted by Rose Robins on Wed, 2016-03-30 17:12

I have a 401k Profit Sharing Plan and a 401k Roth Profit Sharing Plan with my employer (I am self employed). I will be 70 Dec 20th and would like to know if I should move the 401k to the 401k Roth?



Submitted by Alan - IRA critic on Wed, 2016-03-30 18:03

Is the 401k from a prior employer? Sounds like you are more than a 5% owner and therefore RMDs will apply to your current plan even if you continue to work. Also, any transfer of a pre tax 401k to a Roth 401k will be taxable so you should not consider doing that if the tax rate you will pay is higher than what your marginal rate will be when you retire.  What are you trying to accomplish here?



Submitted by Rose Robins on Wed, 2016-03-30 19:00

The 401k & 401k Roth are both with my present employment.  I am 100% owner.  I am trying to pay as little tax as possible.  If I understand correctly the 401k Roth is still subject to the RDM?  If so what are the advantages of the 401k Roth?



Submitted by Alan - IRA critic on Wed, 2016-03-30 19:14

Yes, both the pre tax 401 and the Roth 401k are subject to RMDs if the employee is a 5% plus owner. Once you retire, you can roll the Roth 401k portion over to a Roth IRA and the RMDs will stop the following year. Your first RMD distribution year will be 2017, so if you roll the Roth 401k portion over to a Roth IRA before the end of 2016, there will never be RMDs on that balance. Advantages of the Roth 401k is that you can contribute to it regardless of your income, and that is not true of a Roth IRA, and distributions you take from that plan are typically non taxable if you take them after rolling to a Roth IRA. However, like any Roth conversion, if you roll pre tax money into a Roth account, you will owe taxes for the year of the rollover at your marginal rate. As a result, if you do this while still working, there is a good chance that the rollover income plus your earnings will result in a higher rate than what you would pay for RMDs after you retire. Also, the RMDs while you are still working start out at less than 4% of the account value, while a pre tax to Roth rollover (conversion) would be taxable up to 100%. In summary, you cannot stop RMDs on the plan balance while you are still working, but if you roll over the Roth portion to a Roth IRA every year just before year end, there will be a lower balance in your Roth 401k at year end on which to calculate the next year’s RMD. 2016 is the last year to roll over the Roth portion to a Roth IRA without first taking out an RMD.



Submitted by Rose Robins on Wed, 2016-03-30 20:45

I do not plan on retiring at age 70 -1/2 since I own the company I can keep working.  I do not get paid a salary.  I get the profits on my K-1 which is under $4000 in 2015.  So, would I transfer the 401k Roth to an Roth IRA that I already have next year before April 1st or do before the end of 2016?  Can I roll money from the 401k to the 401k Roth sometime this year and then next year roll back any amount to would put me into a different income tax bracket (recharatization)?  I could not find anything that said if I was still working at 70-1/2 the RMD would less than 4%.  If I understand correctly I can transfer the 401k Roth (all of the assets) to a Roth IRA anytime (this year) and not pay taxes? If I can do this then can I roll some of my 401k to the 401k Roth this year too?



Submitted by Alan - IRA critic on Wed, 2016-03-30 21:09

  • Do the direct rollover of the Roth 401k portion before the end of 2016, since you will have to take an RMD on it if you wait until 2017 which is an RMD year. These are the only funds you can avoid an RMD on altogether. After 2016 and rollovers from either part of the 401k cannot be done until the RMD for that year is satisfied. While it is far from clear whether you should be rolling pre tax money into a Roth, if you recharacterize any such rollover, the funds would have to be transferred into a TIRA account. They cannot be transferrred back into the pre tax 401k. Again, a conversion is likely 100% taxable, which an RMD is less than 4% of the prior year end value of the account.
  • Your RMD %s start low and increase each year. For 2017 the divisor is 26.5 which results in an RMD of 3.77% of the 2016 year end value. For 2018, the divisor is 25.6 which is 3.91% of the value and so on. The %s are not published, just the divisors but you can figure them by dividing 100 by the divisor.


Submitted by Rose Robins on Wed, 2016-03-30 21:26

I do not understand things as quickly as I would like so I hope you will have patience with me for all the questions I have.  I would appear to me that moving the money from the 401k to the 401k Roth is not really necessary as there is no tax advantage.  I would think that just moving the 401k assets to a Roth IRA (not moving to the 401k Roth) is probably is the best thing to do, correct?  I have an IRA that I could transfer funds to this year and once it gets into that account I could move to a Roth that could be recharatized if necessary.Where do I find the divisor? 



Submitted by Alan - IRA critic on Wed, 2016-03-30 22:03

  • Ask whatever questions you wish, no problem. Moving the ROTH 401k balance to the Roth IRA is wise, but not the pre tax 401k money since that is a conversion and would be taxable. Roth 401k to Roth IRA is not taxable. I would wait and do that rollover late in the year so your Roth 401k has no balance from which to create an RMD for 2017.
  • As for your pre tax 401k balance, there is no RMD related advantage to rolling that over to an IRA, since a rollover to a TIRA will result in the same RMD, and a conversion to a Roth IRA will result in the entire converted amount being taxable, although there will not be future year RMDs on that balance.
  • I think your last sentence relates to doing a direct rollover of the pre tax 401k balance to a TIRA, from which you could do incremental small conversions that would not be large enough to raise your tax rate. That is probably more beneficial than a large conversion and you can recharacterize these conversions if you wish. The usual recharacterization is done because the conversion lost money or your tax bill turned out to be higher than you want to pay.
  • The RMD divisors are on p 58 of Pub 590 B attached:  https://www.irs.gov/pub/irs-pdf/p590b.pdf 


Submitted by Rose Robins on Thu, 2016-03-31 00:08

thanks so much for the answers!



Add new comment

Log in or register to post comments