Author Topic: OMG, Did I Make a HUGE Mistake Converting 401k to Roth IRA?  (Read 5397 times)

platosforms

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I left my job earlier this year, and while sitting with a representative from Fidelity, which manages my ex-company's retirement plans, I was asked what I wanted to do with my 401k (about $100k worth) and given the option to roll it over to a Roth IRA. My big question now is, when does that money get taxed since the 401k's taxes are deferred and the Roth IRA money's taxes are paid up front? I just read somewhere that the rollover amount will be treated as income on my taxes this year and get taxed that way. If that's true, I feel like I made a huge mistake by rolling it over to a Roth IRA.

Is there any way I can correct this mistake?

matchewed

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Re: OMG, Did I Make a HUGE Mistake Converting 401k to Roth IRA?
« Reply #1 on: July 24, 2014, 06:57:21 PM »
First of all confirm what type of conversion you made. Did you have a Roth 401k with your previous employer? If so then a Roth to Roth rollover is a non-taxable event. If you did make a traditional 401k to Roth IRA conversion then you will have to pay income taxes on the amount converted in that tax year.

As for correcting it if you made a traditional to Roth conversion... not sure, I don't think there is a method to correct that mistake. Call up Fidelity and get a definitive answer my first question.

sol

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Re: OMG, Did I Make a HUGE Mistake Converting 401k to Roth IRA?
« Reply #2 on: July 24, 2014, 07:07:56 PM »
Yes, conversions from a tax-deferred account like a 401k to a tax-free account like a Roth IRA typically incur taxes in the year of the conversion. 

But I think this is easy to fix, provided you do it before the end of the calendar year.  Just recharacterize the conversion and it's like it never happened.

boarder42

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Re: OMG, Did I Make a HUGE Mistake Converting 401k to Roth IRA?
« Reply #3 on: July 24, 2014, 07:16:50 PM »
Recharachterization just has to happen before tax day

Lifeblood

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Re: OMG, Did I Make a HUGE Mistake Converting 401k to Roth IRA?
« Reply #4 on: July 24, 2014, 08:43:08 PM »
Depending on what other taxable income you have, a conversion is not necessarily a bad thing. I was unemployed last year and did a conversion. After deductions and child credits, the amount I had to pay in taxes was very reasonable and I am glad I did it. Another option is to transfer a smaller amount, thereby reducing your tax burden.

platosforms

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Re: OMG, Did I Make a HUGE Mistake Converting 401k to Roth IRA?
« Reply #5 on: July 25, 2014, 07:18:02 AM »
Thank you for all of the help. I think it was a false alarm, though. The 401k appears to have rolled over into a Traditional IRA, so I should be fine. Thanks again!

John

usmarine1975

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Re: OMG, Did I Make a HUGE Mistake Converting 401k to Roth IRA?
« Reply #6 on: July 25, 2014, 07:32:45 AM »
This should be a note to all on this Forum except those who do their own planning etc...

If you meet with a financial advisor and you sign paperwork.  YOU SHOULD UNDER ALL CIRCUMSTANCES KNOW what you have signed.

What type of account you opened, if you are converting what the ramifications would be.  It is frustrating as one who works in the industry when we lose a client and they have no idea what they are doing or what they signed etc...  Even with those coming to us.  Read Everything you sign.  You should never trust anyone with your signature on some form you have not read.

I am glad this worked out for your but note going forward to take more time if you need it.  Advisors can sometimes be in a hurry and just want to transfer your funds and some will even tell you that you don't need to read what they are asking you to sign.  I disagree READ it.  If they are not willing to let you read it before you sign it.  YOU SHOULD RUN from this person as they do not have your best interest in mind.  It is in your best interest to read and understand what you sign.

Cheddar Stacker

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Re: OMG, Did I Make a HUGE Mistake Converting 401k to Roth IRA?
« Reply #7 on: July 25, 2014, 09:18:39 AM »
Thank you for all of the help. I think it was a false alarm, though. The 401k appears to have rolled over into a Traditional IRA, so I should be fine. Thanks again!

John

Glad it worked out John. If you are retired you might want to start slowly rolling that IRA into a Roth IRA. If you're still working it would likely be best to wait.

Dezrah

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Re: OMG, Did I Make a HUGE Mistake Converting 401k to Roth IRA?
« Reply #8 on: July 25, 2014, 09:20:44 AM »
OP, I'm glad it worked out for you and you feel better.

The post below in red is factually incorrect as was pointed out by subsequent posters but I am leaving it here as a lesson for anyone else with the same misconception.  There is in fact no contribution cap for traditional to Roth conversions; it is simply a good idea to do it slowly to minimize your taxes.  Thank you for everyone who helped me realize this mistake.  I love being wrong when it means I get to learn from my misinformation.

Just as an interesting fact, you were never in danger of incurring a massive tax bill on $100k of income.  The laws for traditional to Roth conversions limit you to the annual Roth contribution maximum, $5500 for 2014.  So even if he somehow set up an automated rollover process, it would take many years and only require taxes on a small piece every time.
« Last Edit: July 25, 2014, 12:55:02 PM by Dezrah »

Cheddar Stacker

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Re: OMG, Did I Make a HUGE Mistake Converting 401k to Roth IRA?
« Reply #9 on: July 25, 2014, 09:26:49 AM »
OP, I'm glad it worked out for you and you feel better.

Just as an interesting fact, you were never in danger of incurring a massive tax bill on $100k of income.  The laws for traditional to Roth conversions limit you to the annual Roth contribution maximum, $5500 for 2014.  So even if he somehow set up an automated rollover process, it would take many years and only require taxes on a small piece every time.

Unless this is a very recent, very quiet change, I don't think this is true.

You pay tax on 100% of the amount you convert in the year you convert it. In 2010 there was a one time only law that allowed you to convert in 2010 and defer the taxes and pay half in 2011 and half in 2012, but that's the only rule I'm aware of that allowed any deferral of the conversion tax.

matchewed

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Re: OMG, Did I Make a HUGE Mistake Converting 401k to Roth IRA?
« Reply #10 on: July 25, 2014, 09:27:49 AM »
Conversions != contributions.

sol

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Re: OMG, Did I Make a HUGE Mistake Converting 401k to Roth IRA?
« Reply #11 on: July 25, 2014, 10:36:31 AM »
The laws for traditional to Roth conversions limit you to the annual Roth contribution maximum, $5500 for 2014.

This is factually incorrect, please remove it from the internets.

boarder42

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Re: OMG, Did I Make a HUGE Mistake Converting 401k to Roth IRA?
« Reply #12 on: July 25, 2014, 11:56:39 AM »
yeah thats wrong

ABC123

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Re: OMG, Did I Make a HUGE Mistake Converting 401k to Roth IRA?
« Reply #13 on: July 25, 2014, 12:10:40 PM »
My husband rolled a 401k into a Roth IRA a couple years ago, about $25k worth.  We had to pay the taxes on it and it was a significant extra payment for us.  We were not thinking about the tax ramifications at the time, and that is a mistake we will not make again.  Definitely make sure you understand how much your taxes will be before rolling it over!

arebelspy

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Re: OMG, Did I Make a HUGE Mistake Converting 401k to Roth IRA?
« Reply #14 on: August 14, 2014, 09:26:27 AM »
Conversions != contributions.

This.  Your max contribution is 5500.  You can rollover (convert) as much as you want to pay taxes on.

As long as you confirm it went into a traditional IRA, you're fine.  If not, you can recharacterize.  But there is no law that's going to trickle that conversion over because of a max conversion amount.
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