Sources: BlackRock; Internal Revenue Service
In some cases, clients can benefit from rolling over a 401(k) into an IRA. Having their retirement accounts in one location makes asset allocation and diversification more transparent. It can also mean more investment options as well as lower fees.
Rolling 401(k) assets into an IRA can make sense when:
|Roll From||Roll to|
|Roth 401(k)||Traditional IRA||Roth IRA|
|Traditional 401(k)||Yes||Yes (see notes below)||Yes||Yes (see notes below)|
|Roth 401(k)||No||Yes (see notes below)||No||Yes (see notes below)|
Traditional 401(k) to Roth 401(k)
Traditional 401(k) to Roth IRA
Roth 401(k) to Roth 401(k)
Roth 401(k) to Roth IRA
As of 2010, anyone with a traditional IRA became eligible to convert it to a Roth IRA. Don’t assume your clients know this. Some of your high-income clients who were previously unable to contribute to and/or convert into Roth IRAs may not be aware of the change.
Clients of any age and income level are eligible to do this conversion, and there is no limit on the amount that can be converted from traditional IRAs and employer plans. This is a great opportunity to initiate a discussion with clients who:
In the year of conversion, all pre-tax dollars included in the conversion would be considered income and, therefore, subject to tax. Thereafter, no further taxation applies, unless the client takes a non-qualified withdrawal.
Required minimum distribution (RMD) considerations
A main advantage of converting assets into a Roth IRA is that there is no RMD requirement for the owner—meaning the assets can continue grow without the requirement for withdrawal at a certain age. At the account owner’s death, however, the beneficiary would need to start taking RMDs by December 31 of the year following the owner’s death.
Discuss the following questions with your clients who are considering converting to a Roth IRA, particularly if they are planning to use the vehicle as part of a generational wealth transfer strategy: