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My father recently retired at 63. He has some money in his 401k (the provider is ADP) and they keep emailing him with an advertisement telling him the ramifications of withdrawing any money out early (due to retiring early).

My dad already wasn't planning on taking any money out of his 401k, he doesn't need any of it right now. But the email also stated things he could do to his 401k. One of those options was to move his 401k to a Roth IRA.

Is this generally considered good / bad practice? I believe the withdrawls from a roth are tax deferred (that is he doesn't have to pay taxes on any withdrawl), but does that mean if we move his 401k retirement money into a roth ira he would pay any additional taxes?

Is it worth moving it or just let it sit in a 401k?

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    The IRA and the 401K both allow withdraws after age 59 1/2 without penalties, though there may be taxes.
    – mhoran_psprep
    Feb 5, 2016 at 16:04
  • okay so he is allowed to withdraw from his 401k but pay taxes on it makes sense. Sounds like from his circumstances it would not be a wise investment to convert this to a roth ira. Thanks for nothing ADP!
    – JonH
    Feb 5, 2016 at 16:08
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    I'm convinced that every email from a bank is from marketing trying to trick me into paying them more money somehow. I would honestly ignore everything in an unsolicited email from the bank, and talk directly to your adviser face to face instead.
    – corsiKa
    Feb 5, 2016 at 18:49
  • With no 401(k) withdrawals just yet, can you give a hint what his taxable income will be this year? I am talking the line near very end of return, "taxable income", which pretty much dictates his marginal rate.
    – JTP - Apologise to Monica ♦
    Feb 5, 2016 at 21:36
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    @sgroves What I assume corsiKa means is that this is marketing for services which, while free to the customer, generate money for the bank, presumably at a disadvantage for the customer.
    – fluffy
    Feb 5, 2016 at 23:37

3 Answers 3

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If he moves his 401K to a Roth all in one go, all the money will be considered income for the year he moves it, and he will have to pay taxes on that income. If he keeps it in his 401K or rolls it into a traditional IRA, he will only pay taxes on the money as he withdraws it.

Bottom line, converting to Roth is almost certainly a bad idea.

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    Well, it might not be a bad idea if he doesn't have any income anymore now that he's retired and the 401k amount is small. Given that he "doesn't need any of [the money] right now," though, probably neither condition is true.
    – Daniel
    Feb 5, 2016 at 16:33
  • There are indeed some edge cases where it might make sense. Another might be if he wanted to put the money into a high-risk, high-reward investment, and lose money on taxes in the short term but save on paying taxes on gains.
    – Phil Sandler
    Feb 5, 2016 at 18:08
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    @PhilSandler the wholesale conversion? I agree, almost always a bad idea. But. A single retiree with say $10k room in his 15% bracket, might benefit from partial conversions each year. Full conversion, throwing someone into the next bracket or right thru the one after that? There's a special place in hell for those who do that to clients.
    – JTP - Apologise to Monica ♦
    Feb 5, 2016 at 21:45
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As Phil notes, converting to Roth means paying tax on the entire amount of the 401(k) (or, the entire amount moved, anyway). Most of the time that's a bad idea. Roth is a good idea when you're young and paying lower taxes (and often have lots of deductions), and when your money will have lots of time to appreciate tax-free.

I imagine there could be edge cases, though, where this could be a good idea. If he's got a lot of savings which he's planning to live off of for a few years (not the income, but the savings itself), then he would have $0 income for those years. In that case, it's logical to convert some of the 401(k) to a Roth IRA, to take advantage of lower tax rates (probably up to or through the 12% tax rate, depending on if his total dollars are enough that he'll be paying an actual tax rate (not marginal) higher than 12% or not).

Now, odds are it's better to take that savings and invest it along with the 401(k) and then live off of those earnings, rather than just spending the savings, but I imagine there are some with circumstances where this would make sense - particularly if, for example, he downsized in houses and has a few hundred K from that, tax-free.

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You don't mention Mom, so I'll talk about single filers. In 2019, the standard deduction is $12,200.

The key thing, in my opinion, is his marginal rate. After the deduction, say his taxable income is $35,000. This is an opportunity to convert $4,475 from the 401(k) to Roth, to "top off" that bracket. Paying 12% on this conversion, and accumulating tax free dollars that will help him avoid being pushed into the 22% bracket in the future.

I realize this post is old. The question is still valid, and the process can be very helpful over time. The approach can best be formulated with exact details, as Joe mentions in his answer. Given the jump from 12% to 22%, there's a savings to be had by avoiding future years when a large withdrawal can create a 22% hit to the excess amount.

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