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Say you contribute $18k /year towards your 401k and $5,500 /year towards your Roth IRA. Also say you change jobs every 3 years. Can you roll over the $54k (plus interest) from your 401k into a Roth IRA account, essentially allowing you to circumvent the Roth IRA contribution limit? Obviously, I'd have to pay tax on the $54k now, but I'd get to avoid paying taxes on around 30 years of capital gains, which is huge (not to mention all the additional investment options you get with an IRA relative to a 401k plan). I'm looking at changing jobs, and doubt I'll ever stay put anywhere for more than a few years, so can I just keep dumping my entire retirement accounts into my Roth IRA? Assume that I'll be making maximum contributions to towards Roth IRA each year (currently $5,500 /year).

Yes you can do that.

In the past you could not convert if your AGI (single or married) was over 100k. If you are going from pre-tax 401k to Roth IRA you are technically converting so a lot of people were kept out. In 2010 the IRS eliminated the 100k limit so anyone could convert. As long as that stays the case you can move everything from your 401k in to your Roth if you have an event which lets you take it from the 401k, like a job change.

OP here. I'm surprised more people, who frequently change jobs, don't roll over into Roth IRA. I mean the tax advantages of Roth IRA are massive, and doing the rollovers effectively allows you to contribute $23,500 per year towards your Roth IRA (assuming you max out both your 401k and Roth IRA accounts each year). The only real disadvantage I see to the rollover is you lose some of the protections from judgment creditors/bankruptcy that your 401k account has, but the tax advantages seem to outweigh that.

EDIT- actually, it's more than $23,500 per year, since your employer's yearly matching contributions also can be rolled over. Seems like an easy way to build a really large nest egg by simply avoiding paying uncle sam on the long-term capital gains. I'm really surprised that this is allowed under the IRS tax rules (I mean it literally allows you to circumvent the $5,500 per year contribution limit towards Roth IRA).

Most people just don't want to or can't afford the taxes. You'd be surprised at how often people at tax time would decide to recharacterize, meaning either reverse a roth conversion or switch their contributions from roth to traditional. Everyone wants that money now.

Keep in mind that when you go from 401k to Roth you'll want to pay the taxes from a source other than your 401k or else you'll have to pay a 10% penalty on whatever you take from the 401k to cover the tax liability. Something to think about.

Tiago Splitter wrote:Keep in mind that when you go from 401k to Roth you'll want to pay the taxes from a source other than your 401k or else you'll have to pay a 10% penalty on whatever you take from the 401k to cover the tax liability. Something to think about.

I am not the anonymous user above, but am about to change jobs, and this is super helpful. Thank you!

Tiago Splitter wrote:Keep in mind that when you go from 401k to Roth you'll want to pay the taxes from a source other than your 401k or else you'll have to pay a 10% penalty on whatever you take from the 401k to cover the tax liability. Something to think about.

Well, paying taxes from the 401k doesn't make a lot of sense to begin with, since it reduces the amount you're able to rollover into the Roth IRA. My goal here is to stash away as much as I possibly can into my Roth IRA, so I can avoid taxes on 30 years of capital gains, which is massive. I mean if you need $50k /year to live off after retirement, that means pulling out nearly $70k /year from a 401k account (to pay taxes on the $50k), but only $50k from a Roth IRA account. That's a big difference... Not to mention how much better I do on my taxed investments (like my Roth IRA), since I have so many more options (e.g. I have a large amount of money in health care stocks, which is very profitable right now since baby boomers are dying off, and that's something I can't do with my 401k).

Anonymous User wrote:
Well, paying taxes from the 401k doesn't make a lot of sense to begin with, since it reduces the amount you're able to rollover into the Roth IRA. My goal here is to stash away as much as I possibly can into my Roth IRA, so I can avoid taxes on 30 years of capital gains, which is massive. I mean if you need $50k /year to live off after retirement, that means pulling out nearly $70k /year from a 401k account (to pay taxes on the $50k), but only $50k from a Roth IRA account. That's a big difference... Not to mention how much better I do on my taxed investments (like my Roth IRA), since I have so many more options (e.g. I have a large amount of money in health care stocks, which is very profitable right now since baby boomers are dying off, and that's something I can't do with my 401k).

You probably already know this but for the same reason you want to use the Roth for high dividend stocks.

The analysis isn't quite as simple as you are making it out to be. The biggest drawback to your plan is that the amount you spend on taxes doing the conversion is money that could be invested or used to pay down debt or whatever. If you convert a $50k 401k to a Roth IRA on a biglaw salary, that's probably close to a $20k tax bill once you include state taxes. If you invest $20k and get an 8% return over 30 years, well, you can do the math. It's not obvious that saving money on taxes when you withdraw money from your current 401k is worth losing the earnings on $20k over 30 years, because that's also a pretty massive loss.

The usual advice from financial planners is that a Roth IRA conversion makes sense if you expect to be in a higher tax bracket when you retire than you are currently. Thus, doing a Roth IRA conversion right after quitting biglaw is probably not a good idea. On the other hand, if you (hypothetically) quit biglaw to go solo and had very little income your first year, then yes, by all means do the conversion during your first year as a solo, since the tax bill will be close to 0. But make sure you take the lost earnings on the money you give to the taxman into the equation when you calculate whether or not a conversion makes sense.

Anonymous User wrote:The analysis isn't quite as simple as you are making it out to be. The biggest drawback to your plan is that the amount you spend on taxes doing the conversion is money that could be invested or used to pay down debt or whatever. If you convert a $50k 401k to a Roth IRA on a biglaw salary, that's probably close to a $20k tax bill once you include state taxes. If you invest $20k and get an 8% return over 30 years, well, you can do the math. It's not obvious that saving money on taxes when you withdraw money from your current 401k is worth losing the earnings on $20k over 30 years, because that's also a pretty massive loss.

The usual advice from financial planners is that a Roth IRA conversion makes sense if you expect to be in a higher tax bracket when you retire than you are currently. Thus, doing a Roth IRA conversion right after quitting biglaw is probably not a good idea. On the other hand, if you (hypothetically) quit biglaw to go solo and had very little income your first year, then yes, by all means do the conversion during your first year as a solo, since the tax bill will be close to 0. But make sure you take the lost earnings on the money you give to the taxman into the equation when you calculate whether or not a conversion makes sense.

Agree, and it's definitely not obvious that OP should do this. OP needs to think about their retirement plan to determine how the 401k money would be taxed. One other factor is that the general consensus says that marginal rates will be higher in the future (certainly the top marginal rate, and I think it's fair to say that even the average effective rate will also be higher).