Roth IRAs, 401(k)s, and traditional IRAs are all investment options tied to tax implications and retirement. Making sure that they're handled most optimally for your situation is a priority for a comfortable retirement. Here at Kelly Capital Partners, we understand that the investment process can be confusing. So, we've put together a 401(k) rollover guide for you.
With Kelly Capital Partners, it is possible to roll your old 401(k) directly into a Roth IRA. The only thing that you'll need to do is check that you qualify. If you do, you'll only owe taxes on the pretax assets you roll over. Something else to note is that if you have assets in a Roth 401(k)–also known as a Designated Roth Account–and you're interested in rolling these over to an IRA, it will have to be a Roth IRA account rather than a traditional one.
If instead, you're looking to convert your Traditional IRA into a Roth IRA, you will need to take an RMD within the year of the rollover, before transferring the funds.
Roth IRAs are a great consideration for most investors when they're looking into a retirement plan. Investing in your Roth IRA allows you to have your assets grow tax-free. This increases your savings.
Another benefit is that Roth IRAs don't have a required minimum distribution during your lifetime as the owner. They're also a popular choice because inheritance to your heirs is tax-free.
Before 2010, only those account owners who had a modified adjusted gross income below $100,000 were eligible to convert. Today, anyone can convert their eligible IRA assets to a Roth IRA regardless of income or marital status.
However, despite its advantages, a Roth may not be the best option for all investors. There are three important factors for you to consider—taxes, time, and costs. A consultation with Kelly Capital Partners can clear up your concerns.
Consulting with a Kelly Capital Partners financial advisor will give you a better idea about whether a Roth IRA account will suit your circumstances. You can find out more about Roth versus traditional IRAs here, to get an idea of your eligibility for this conversion.
Distributions from a Roth IRA are qualified, and thus tax-free and penalty-free. However, these benefits apply provided that you've satisfied the 5-year aging requirement and at least one of the following conditions:
All other distributions are non-qualified. Non-qualified distributions of converted balances are not taxed again (since the government taxed them during conversion), but there may be a 10% penalty charge unless it's been at least five years since the beginning of the year of your conversion, you've reached age 59½, or one of the other exceptions applies.
RMDs are not required during the lifetime of the original owner of a Roth IRA. RMD amounts are not eligible to be converted to a Roth IRA.
When converting a traditional IRA, keep in mind:
Rules of a Roth IRA
The Roth IRA account allows for tax-free withdrawals as long as you're over age 59 ½ and you've had the account for over five years.
Rules on contributions limit them to $6,000 annually or an additional "catch-up" contribution of $1,000 for those over 50.
To contribute to the Roth IRA you need to fall within certain income limits:
What's the breakeven?
One way to assess whether a Roth or traditional IRA could be best suited for your situation is to look at a break-even analysis, which examines the point at which profit and loss are equal.
Consider the following hypothetical example:
A couple, both in their mid-70s, are contemplating moving their traditional IRA assets into a Roth. The reason is simple: Their RMDs from a traditional IRA exceed their living expenses. In addition, by having a higher income, they may get Medicare premiums or a higher hurdle for deduction of medical expenses on their tax returns. But by moving their assets to a Roth, they would not be required to take—or pay taxes on—distributions they did not need.
In this scenario, a client that's on the Kelly Capital Retirement Road Map would get assistance from the team by getting a breakeven analysis. Notably, this example assumes that leaving a legacy was not a priority for the clients. In this case, the results from the analysis would be:
Their breakeven for a Roth conversion would be 14 years. So, each would be well into their 80s before the switch made tax sense.
Using breakeven analysis results, you can make more informed decisions about your assets and plan your timelines correctly.