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401k Rollover to Roth IRA or Traditional IRA

Updated: Aug 4, 2021


Hey Mike,

I have some funds from a previous job 401k that has just been sitting there. I started that account when I started my job. I spoke to them the other day and they let me know of a couple different options.

They suggested that I can either leave it., but since I’m not working there anymore I can’t contribute to it. Or I can transfer it to a rollover IRA in order to make contributions or I can transfer to a Roth IRA which would cause me to have to pay penalties.

I’ve been reviewing the different types of account management options too.

Do you think it would be wise for me to transfer these funds? Or just keep two accounts?


My response by email before our call

Hey Nick,

Money you put in a Roth IRA is already taxed. Money in an IRA and 401k has not been taxed so when you roll money into a Roth IRA from a 401k you will have to pay income tax on your contributions, your employer-match contributions and all earnings.

Do you know your tax rate? I assume that considering the size of the assets in the 401k will not push you into a higher tax bracket and your current tax bracket is lower than your future tax bracket so it would make sense to roll into a Roth IRA now and go ahead and pay the tax at your current lower rate. If you expect to have a lower rate later, then you should roll into a traditional IRA and continue to push your tax bill down the road.

Managing one account is easier than two and I don't see a benefit to keeping the 401k. To make it easy, you can probably open a Traditional IRA or Roth IRA with the current 401k provider and the transfer should be easy.


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