401k to IRA direct rollover

Submitted by Tom Messinger on Wed, 2021-02-17 14:27

I retired early last year. My wife and I have approximately $500,000 in our government 401ks. I receive a monthly government pension and my wife will receive a small monthly pension starting in August of 2021. We currently believe we can live on our pensions and we own our home free and clear. I have always handled the investments in our 401ks, mostly because my wife has never liked dealing with them. Due to health reasons, I have been on a quest to simplify our investments for her sake.

I have consolidated all of our IRA’s and investments with one brokerage company over the last five years. I’m currently considering rolling our 401ks to IRAs for a few reasons. First, it will further simplify things for my wife if all of our investments are in one place. Second, there will be no fees for the IRAs unlike our current 401ks. Third, the investment choices for our 401ks are very limited and recently they have dropped some mutual funds I was invested in without replacing them. Am I’m I missing any disadvantage to rolling over our 401ks to our IRAs. Second, should I take it a step further and convert at least some of the 401ks to a ROTH IRAs?

Thanks for your input,
Tom



Submitted by Alan - IRA critic on Wed, 2021-02-17 14:51

If you are over 59.5, and do not live in a state with poor IRA creditor protection, you should do direct rollovers into IRAs. Once the funds are in an IRA, and you assess that you could convert at a lower rate than you expect in the future, you should do those conversions. If your either of your health declines at a high rate, then the marginal rate in retirement will spike when filing single, so you should convert more. Remember that Medicare rates are surcharged (IRMAA) once joint MAGI including conversions exceeds an amount in the mid 170k. Conversions amounts should be managed each year to arrive at the optimal amount to convert. If you are under 59.5, and may need to draw on retirement funds prior to 59.5, please advise.

Submitted by David Mertz on Wed, 2021-02-17 15:33

The only other reason I can think of to leave at least some of this money in the qualified retirement plans is if you reside in a state where distributions from qualified retirement accounts, but not from IRAs, would qualify for a pension exclusion.

Submitted by Tom Messinger on Wed, 2021-02-17 15:56

Your input is greatly appreciated.  We live in KY and it does have creditor protection for both conventional and Roth IRAs, but my understanding it is left to the judge how much will be exempt in the case of bankruptcy. We are both over 59.5 and I will turn 65 in two years (my wife is 3 years young than I).  We currently don’t forsee needing the funds in the near future.  Based on your comments above, it sounds like we should persue conversion now and plan yearly conversion amounts to minimize taxes (keeping in mind the Medicare surcharge after I turn 65).  We currently have enough pre-tax dollars to pay the taxes as well.

Submitted by Tom Messinger on Wed, 2021-02-17 16:04

Kentucky taxes all pension income, including traditional IRAs, at 5 percent once an exemption threshold of $31,110 is passed.  So, we would owe state taxes whether we convert now or later since we already have pension income greater than the $31.110 exemption.

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