{"id":401,"date":"2021-11-15T13:00:00","date_gmt":"2021-11-15T13:00:00","guid":{"rendered":"https:\/\/moneywithkatie.com\/should-you-convert-your-401k-rollover-to-roth-now-or-later\/"},"modified":"2025-09-05T16:52:11","modified_gmt":"2025-09-05T16:52:11","slug":"should-you-convert-your-401k-rollover-to-roth-now-or-later","status":"publish","type":"post","link":"https:\/\/moneywithkatie.com\/should-you-convert-your-401k-rollover-to-roth-now-or-later\/","title":{"rendered":"Should You Convert Your Rollover IRA to Roth?"},"content":{"rendered":"
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I am, once again, flinging myself down the tax rabbit hole that is the Traditional vs. Roth debate.<\/p>\n

Why? Because of one simple question on a recent post that I <\/em>thought was relatively straightforward:<\/p>\n

\u201cBut if this account is only going to get bigger, shouldn\u2019t I convert it to Roth now while it\u2019s smaller instead of wait until it\u2019s huge?\u201d<\/p>\n

As I foamed at the mouth for a chance to explain how Roth conversions actually work in retirement, I sat back for a moment and thought about if there were a better way to demonstrate the dilemma you\u2019ll likely face the first time you go to roll over an old employer-sponsored 401(k). <\/p>\n

(For the record, though, it\u2019s generally<\/em> considered unwise to ever<\/em> convert an entire 401(k) to Roth all at once \u2013 whether you\u2019re young or old \u2013 because the entire flippin\u2019 thing gets taxed at your marginal tax rate as if it\u2019s income, meaning you\u2019ll probably get stuck with a fat ass tax bill that you may or may not expect later. It\u2019s almost always a good idea to do it little by little each year, whether that\u2019s now or later.)<\/p>\n

Rolling over a 401(k) to an IRA<\/h2>\n

If you\u2019ve got a 401(k) with an old employer that you\u2019d like to move into your tender loving care as an IRA that you\u2019re managing instead, Capi<\/a>tali<\/a>ze<\/a> is the easiest (free) way to handle it. I have a full deep dive about the rollover process here<\/a>, in case you\u2019d like to go read that first.<\/p>\n

But let\u2019s say you\u2019ve already decided you\u2019re going to roll over your 401(k) into an IRA \u2013 if your 401(k) was Traditional (pre-tax), you may be wondering\u2026 Hm, should I keep this as pre-tax money and roll it into a Traditional IRA, or should I convert it to Roth and roll it into a Roth IRA?<\/em><\/p>\n

Tax-free, penalty-free 401(k)-to-IRA rollovers<\/h2>\n

Now, the easy, pain-free, math-free way to roll over an old 401(k) into an IRA is to keep the tax status the same<\/strong>. That is to say:<\/p>\n

If your 401(k) is Traditional, roll it into a Traditional IRA. No tax bill, no problem.<\/p>\n

If it\u2019s Roth, roll it into a Roth IRA.<\/p>\n

If it\u2019s both, roll it into both (Capitalize<\/a> does that for you, if you\u2019re like, \u201cShit, that sounds complicated,\u201d).<\/p>\n

But what if you\u2019re thinking like that person who messaged me? What if you\u2019re thinking you\u2019d rather convert that big ole\u2019 pre-tax 401(k) into Roth now, rather than later?<\/p>\n

Why is the timing of a Roth conversion on a 401(k) rollover important?<\/h2>\n

Well, mostly because of that tax bill.<\/p>\n

Today, I want to explore the downstream impacts of converting a 401(k) to Roth in your #youth (all at once) versus<\/em> waiting until you start taking distributions in retirement (whether you\u2019re a young or old retiree). <\/p>\n

When I originally ran some of these numbers, my eyebrows raised. It was more dramatic than I thought.<\/p>\n

But as with all things related to tax planning, there needs to be a giant, neon, flashing light above all of this that share one important thing:<\/p>\n

So much of these outcomes depend on your personal wealth situation<\/h2>\n

For the sake of the example, we\u2019re going to have to make some assumptions. Here are a few assumptions we\u2019re making for our projections:<\/p>\n