Q. I left my previous job and want to convert my 401k into a Roth IRA. Is there any reason not to do it?
A. There are two reasons against this conversion.
1. Tax Impacts
The reason to do a 401k to Roth IRA conversion is because your current tax rate is low (so you want to pay tax now instead of later). However, it's probably best for you to wait until late in the year to do the conversion because by then you will have a more accurate estimate of all your income and therefore the tax impact.
This is important because unlike a conversion of an IRA to a Roth IRA, you can not undo the 401k conversion to Roth IRA later due to "recharacterization,” If you find yourself with more income than you expected earlier after the conversion, you might regret but have no recourse.
2. Need Spare Money
You better to have money outside your plan to pay the taxes on the conversion because any money out of 401k will be treated withdrawal and result in penalty for you if you are younger than 59.5. You may be able to access funds in the plan to pay the taxes via a loan but that has its own negative repercussions.
A. There are two reasons against this conversion.
1. Tax Impacts
The reason to do a 401k to Roth IRA conversion is because your current tax rate is low (so you want to pay tax now instead of later). However, it's probably best for you to wait until late in the year to do the conversion because by then you will have a more accurate estimate of all your income and therefore the tax impact.
This is important because unlike a conversion of an IRA to a Roth IRA, you can not undo the 401k conversion to Roth IRA later due to "recharacterization,” If you find yourself with more income than you expected earlier after the conversion, you might regret but have no recourse.
2. Need Spare Money
You better to have money outside your plan to pay the taxes on the conversion because any money out of 401k will be treated withdrawal and result in penalty for you if you are younger than 59.5. You may be able to access funds in the plan to pay the taxes via a loan but that has its own negative repercussions.
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