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My wife has a 401(k) account with her employer. It has about $900,000.00 in it. I see her employer has a Roth 401(k) available. Would it be prudent to convert her current account to the Roth 401(k) or just open a Roth 401(k) for her last few years?

If what i'm asking is even possible. i.e. converting her current account to a Roth, or opening a 2nd 401(k) that is a Roth? She has about 9 years left before retirement.

Jul 16, 2013 by Bonnie from Honolulu, HI in  |  Flag
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3 votes

Yes, your wife your wife can convert all or a portion of her 401(k) to the Roth 401(k). Keep in mind the conversion is a taxable event, so a proper analysis as to the best course of action should involve a financial planner and your CPA. Especially, if you don't have assets (outside your 401(k)) to pay the taxes, you may decide to just put all or a portion of new contributions to the Roth option. There are many variables to this decision, but a little time with a fee-based financial planner should help. These factors include how and when you will need to use these assets in retirement, your current tax bracket vs projected future tax bracket, your needed flexibility around tax planning in retirement, perhaps your desire to never take a distribution and leave a tax-free legacy. I am a fan of having at least a portion of your wife's assets in a Roth, but how you get there depends on your situation. Good luck. Mark

Comment   |  Flag   |  Jul 16, 2013 from Warwick, RI

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Be sure you understand that if you convert $900,000 in the 401k to a Roth in a single year, your income from that event would be $900,000 plus your salaries, so if you both made $50000 a year you would have TAXABLE income of $1,000,000. This would put you in the highest tax bracket for the year, so you would have to pay several hundred thousand dollars in taxes if you converted the whole thing. Yes, there could be tax benefits down the road, but I would be highly skeptical given the high cost today - certainly don't do it without advice of a CFP(r) and tax advisor who can study your whole situation.

Conversions usually make more sense to do a little at a time, particularly if you have a low income year in which the extra income from conversion won't hurt so much.

This is a major financial decision which screams for much more in depth and personal professional financial advice than you will get in on online forum.

Comment   |  Flag   |  Jul 16, 2013 from Bridgewater, NJ

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Rich Winer Level 20

I second Marks comments adding that you should only convert funds to the Roth 401K if you can pay the taxes from outside her 401K and any other retirement plan. Paying taxes from inside a retirement plan creates a viscous circle of having to pay taxes on taxes and depletes money that could have continued to grow tax-deferred. I recommend consulting with a local advisor who can ask the important questions to consider, assess you financial situation, goals and objectives and help you make the right decision.

Roth IRAs and 401Ks are great if you believe you will be in the same or a higher tax bracket in retirement or if you do not anticipate a need for some of your retirement funds, would like them to continue to grow tax-free and would ultimately like to leave them to your beneficiaries tax-free. If you and your wife fit that description, you should at least consider making contributions to a new Roth 401K. A lot multigenerational wealth can be created through the intelligently planned use of Roth IRAs. You are wise to be considering your Roth options.

I should also add that if you have substantial income, are maxing out your retirement plan contributions and would like to shelter some of your additional income or investment assets from taxes, life insurance can be used an "Alternative Roth IRA." While there is a cost for the life insurance, it provides unlimited contributions, tax-sheltered growth, various investment options, unlimited growth potential and ways to access your funds tax-free, later in retirement. It also provides immediate wealth-building leverage. With your wife having accumulated such a substantial sum in her retirement plan AND being about 9 years before retirement, you and she may be good candidates for this wealth-building strategy. You might want to discuss this strategy with a local advisor.

1 Comment   |  Flag   |  Jul 16, 2013 from Woodland Hills, CA
Jim Hyre, CFP®

Since there are numerous variables to consider, I also would recommend a good local Certified Financial Planner. Nonetheless, here is a good basic calculator to see where your breakeven point is from a tax perspective. http://www.schwab.com/public/schwab/investing/retirement_and_planning/understanding_iras/ira_calculators/roth_ira_conversion

Flag |  Jul 16, 2013 near Columbus, OH

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You have asked one of the most complex questions in financial planning. Find a local Certified Financial Planner and let them help you make this decision. It will not only involve income tax decisions but could also involve estate planning and asset transfer issues. The Roth IRA and Roth 401k are very powerful tools and a knowledgeable financial planner will be able to help you take advantage of that power. Good luck.

Comment   |  Flag   |  Jul 16, 2013 from Kingsport, TN

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Bonnie, as already stated, any conversion would be subject to income tax, and it is recommended you use after tax dollars. So it may be prudent if you have disposable after-tax dollars. The number of years of tax free growth before retirement could be a factor, as well as other financial assets. I am assuming that you have not co-mingled pre-tax dollars with after-tax dollars. If so, then the conversation would be a little different. Yes you can direct future contributions to be Roth contributions. You would just have a separate account on your 401(k) statement

Comment   |  Flag   |  Jul 17, 2013 from Delray Beach, FL

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Aloha Bonnie, These are great responses. Regardless of what you decide with the current 401k. I would encourage you to contribute to the Roth 401k going forward. You can roll this to a traditional Roth after you leave the company and continue the tax free growth. Hopefully, you will get a company match into the Roth401k as well.

Comment   |  Flag   |  Jul 18, 2013 from Franklin, TN

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