Retirement - 401K to a Roth or other account

[RichardT153220]

Hello,

My goal is to in April next year to semi-retire, mainly stop working for my current company.

I want to take the 401K and my Rollover IRA and pull the money out and pay taxes upfront, and then move the contents of both into what will be then a tax free account. Maybe create a new whatever type of account that allows me to pull out money tax-free.

I know a high-yield Savings account where the money there has already had the taxes paid would work but 4% on a high-yield savings doesn't compare to a 10% stocks account of sorts. So I think it is better to create a new account for investing. What be the best route for my goal?

[BalbonisMoleskine]

The Roth is tax free only as long as Congress allows it to be. There is so much money in Roth accounts that eventually and inevitably Congress will start taxing it to prop up SS. 

If that sounds far fetched, remember that a lot of people assumed the same thing about taxation of SS benefits. 

[Tonster521]

@RichardT153220 Both DirkB and Gail1 have provided outstanding advice. Without providing any details such as your age(s), if married, the value (or hypothetical value) of your tax deferred accounts (i.e., 401 K, IRA Rollover, etc.), your earned and unearned income, your tax bracket, your estimated earned income from semi- retirement, and, if married, your spouse's earned and unearned income. You are proposing walking into a "tax minefield". So, you need to step carefully. 

From a general "big picture" perspective, the only time it makes financial sense to elect a total distribution and prepay Federal Income Taxes (FIT), is if you are currently in a lower tax bracket (i.e., 12%) and expect to be in a higher tax bracket in the future (i.e., 22%). It makes sense to pay 12% now to avoid 22% in the future. However, if you are going to pay 22% now to avoid 12% in the future, that is not a sound financial strategy. Why would you elect to pay greater FIT? Instead, issue those monies to a charity of your choice or a church. They will put put the money to better use than the federal government.

[RichardT153220]

Thanks to all for the great advice from everyone....I see I have a lot of details to iron out, quite a bit of details. 

Richard

[GailL1]

@RichardT153220 

You need some guidance in the timing of the process at least - if not, you will suffer the consequences.

Here is at least one problem - Income Related Monthly Adjusted Amounts (IRMAA)

A good explanation can be found in this article:

https://www.nerdwallet.com/article/insurance/medicare/what-is-the-medicare-irmaa 

You must register for Medicare when you turn 65 years old.  If you have no verified creditable coverage thru your work, you will have to begin to pay Medicare Part B and Part D premiums.  If your taxable (MAGI) income is over a certain level, then in addition to the regular premiums for Part B and Part D, you will be assessed an IRMAA premium surcharge also on Part B and Part D.  

SSA is actually the agency that will assess these premiums and they will be looking at the last tax return for which is on file for you to which they have access.  Usually that will be your tax return for (2) years back.  

So if you happen to do some of this ROTH conversion in that year - the amount will show on your taxes and ordinary income tax will be assessed - and it will be countable as income in that year for your Medicare Part B and Part D premiums and may shoot your premiums up by a whole lot based on this timing methods which you chose.  

It isn’t that you cannot do what you have described - it is just you have to do it when it is the best time to do it - because there maybe some unintended consequences.  So see an expert when you do the conversion and make sure they know what they are doing in this regards.  

It maybe that you will want to pick another year to do it , or perhaps you do it bits at a time so as to not shock the old MAGI.  

Good Luck

[DirkB349973]

You should speak with a financial adviser or someone that understands the consequences of what you are planning. This affects everything.