Can You Roll Your 401k Into A Roth IRA?! (Well, sort of)

(Watch the video on this topic too)

Rolling your 401k straight into a Roth IRA would be the absolute perfect retirement strategy (if it were possible).

That way you could take a tax deduction on your money today, allow it to grow tax-deferred, and then transfer it straight into a vehicle (a Roth IRA) that would allow you to take every dollar out (including the investment growth), completely tax-free in retirement without a tax bill today…

That would be an unbeatable strategy if it were possible, but the problem is that the IRS runs the blocking-and-tackling on this type of a transaction (because like a mobster, they want their cut).

So you can’t roll your traditional 401k straight into a Roth IRA, but there is a way to accomplish this with a little added complexity (but a lot of times it is worth it).

The way the IRS rules are currently, you can roll a traditional 401k into a traditional IRA (only) and you can roll your Roth 401k into a Roth IRA (only).

But, here’s where it gets good.

If you perform one of these 401k rollovers correctly, you can begin positioning yourself for a completely tax-free retirement…

The way to do this is to roll your 401k into a traditional IRA while simultaneously opening a mirrored Roth IRA account.

Doing this gives you the opportunity to review your tax situation each year and decide exactly how much money you would like to (if any), move from the traditional account to the Roth account (depending on your tax situation each year). 👏

Some years it might make sense, and other years it might not!

If you are in your peak years of income earning, it probably doesn’t make sense (although a strong argument can be made about the virtual certainty of higher tax rates in the future).

But, let’s say you’re 62 and you sell your business this year…

Your tax bill is likely very large this year (because of your income and the proceeds of your business sale), so it’s likely NOT a good year to convert money.

In this situation, paying taxes today to move money over to your Roth account with an already large taxable income probably doesn’t make sense.

But next year will likely be very different.

If you can live for a few years in retirement without any taxable or reportable income (more on how to do this in a future blog), you have the potential to reposition a large portion of taxable retirement money, into a tax-free retirement (moving money from the traditional IRA/401k environment to the Roth IRA/401k environment).

Not only does this allow you to take advantage of the huge opportunity that currently exists with tax cuts set to expire in 2026, but it allows you position your assets in a way that can allow you to take your social security check, completely tax-free as well (you do this by keeping your provisional income below the IRS thresholds).

This is a strategy that needs to be properly analyzed before it’s executed, but there are a lot of different scenarios and ways that you can reposition a significant amount of money in a short amount of time (like I talked about in this case study), so that you can achieve a completely tax-free retirement.

Like I said, it doesn’t always make sense, but it can be a very valuable option to explore.

Reach out directly if you would like to review your situation and see if it might make sense for you.