Should I rollover my pre-tax employer investment acct 401k or convert it to a Roth IRA?

[SJH57]

I'm 65 and retiring from my State of California employment. I currently have an employer sponsored 401k with 120k and a 479b with 80k. My options are to leave the $ in the current acct, rollover the $ to a Fidelity IRA (with many more investment options than the employer plan), or convert the4 into my Fidelity Roth IRA. Leaving my $ where they are is not an option for me. Of the remaining choices (from what I've read), if I convert the $ to my Roth IRA, the $200k is considered ordinary income and would dequalify me for my $7500 yearly contribution that I've already contributed to the account and would need to be withdrawn along with any interest (and I would need to pay income tax on the deposit. My other option is to rollover the $ to a traditional IRA (and pay no tax right now), and then convert the traditional IRA in to my existing Roth IRA (and still pay the income tax at a lower tax bracket, since theoretically my income will be less). Does this sound like I've considered al the tax ramifications correctly?
Also, in regrad to the "5 year rule" for Roth IRA contributions, does this apply to conversion contributions? And does the 5 year clock reset every time I make a contribution?

Thanks to anyone who can provide any info!

[NCperson]

I'll just respond to part of your inquity.  

Since you are over 59.5,  on the Roth....

1) distributions of contributions are tax free

2) distributions of conversions are tax free

3) distributions of EARNINGS are subject to income tax UNLESS ANY ROTH account you own has been open for 5 calendar years.   So only this bucket could be subject to tax.  And since the IRS presumes ALL contributions and conversions are distributed before earnings, it is highly unlikely (but possible) this bucket would ever be taxed.  This never resets for new contributiosn; simply the earnings are tax free once any Roth you own has been open for 5 calendar years. What year did you open the Fidelity Roth IRA?

4) there is never a 10% penalty on a distribution since you are older than 59.5 years old/ 

why do you beleive you need to covert ALL the money AT ONCE to a Roth.  The tax bite is probably going to be smaller is you spread it out over a few years.  Since you are 65 and presumably on Medicare, you will become subject to IRMAA, which is a stealth tax, that can sigficantly increase Medicare premiums for the one year.  If you have an additional $200,000 of income for one year due to the conversion to a Roth, and you are single, the IRMAA premium is approximately $442 per month for that one year (and that is on top of the $164.90 per month normal premium).

[SJH57]

@NCperson

thanks for the response,

I opened the Fidelity Roth IRA in April 2018, but didn't fund it until 7-23- 2018. I've contributed the max allowed amount every year since then, with the exception of 2022 when my income was over the allowed amount and I had to withdraw the contribution and accrued interest.

Noted your point about not converting all the funds to my Roth right away. Makes perfect sense, but it does make sense to rollover all of the fundsfrom my employer plan to my fidelity plan now?

thanks for the bit on the IRMAA - will have to read up pn that - I've never even heard of it before. Because of my state employment, I don't believe I will have a monthly out-of-pocket premium, id the tax based on yearly income - do you know gross or adjusted income? Also, I haven't applyied for SSI yet, I get a small state pension of 2210 per month, and no other job related income, only stock related dividends.

Does the IRA to Roth IRA conversion need to take place within 60 days of my seperation from my employer?

thank you for your help. Steve

[rjs]

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@SJH57 wrote:

I haven't applyied for SSI yet

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@SJH57 

You are not going to apply for SSI. SSI is Supplemental Security Income, not Social Security benefits. They are both paid by the Social Security Administration, but they are not the same thing.

SSI is for people who are either over 65 or disabled and have very low income and very low assets. With your pension and dividends, and the amount of money you have in retirement accounts, there is no way you would qualify for SSI. You are going to apply for Social Security retirement benefits.

[dmertz]

Some misinformation in the original question:

It's a governmental 457(b) plan, not a 479b.

As Critter-3 said, there is no requirement that if you convert to a Roth IRA that you convert the entire amount.

Amounts converted to a Roth IRA do not affect your eligibility to contribute to an IRA.  For the purpose of a Roth IRA conversion, one of the modifications to AGI is to subtract the taxable amount of any amount converted to a Roth IRA.  There is no MAGI limit to contribute to a traditional IRA, but the Roth conversion will raise your MAGI for the purpose of being able to deduct a traditional IRA contribution if you are covered by a workplace retirement plan (which you are for 2023).

If you have no basis in nondeductible traditional IRA contributions, there is no difference between converting some amount directly from one of the employer plans to a Roth IRA and  first rolling over those funds to a traditional IRA and then immediately converting those funds to Roth.  With no nondeductible traditional IRA contributions, rolling over everything to a traditional IRA first and then converting some amount to Roth is probably a bit easier to manage.

There is no 5-year conversion rule for those over age 59½ because that rule is only for determining if upon making a distribution from a Roth IRA there needs to be a recapture of an early-distribution penalty.

Because your first Roth IRA contribution was for 2018 and you are over age 59½, as of January 1, 2023 your Roth IRAs are qualified and any amount you take our of your Roth IRAs is free of any tax or penalty.

[NCperson]

first, since your Roth has been open and funded since 2018, then it meets the '5 year test" (calendar years 2018, 2019, 2020, 2021, 2022).  And since you are older 59.5 years old, no matter what you withdraw from the Roth, it is going to be tax-free and penalty free.  

here is a good website that explains IRMAA.  I find that most people I run into in their early - mid 60's have never heard of IRMAA.  

https://thefinancebuff.com/medicare-irmaa-income-brackets.html

It might be worth it to employ a financial planner for a few hours work.  It could save you an enourmous amount of taxes.

You wrote that you need to exit from the current administrator of your retirement funds.  Why can't you simply roll it all over to a Traditional IRA (I am assuming it is all 401k money) and figure out the conversions to a Roth with the planner? what is the rush to do the conversion? 

I am not familiar with a 479b...did you mean a 457b? 

<<Does the IRA to Roth IRA conversion need to take place within 60 days of my seperation from my employer?>>

NO.  there is no need to EVER convert from a TRAD IRA to a ROTH IRA,  if that is your desire.  You could decide to covert to a Roth many years into the future; there is no time limitation (but once you are subject to RMDs, you must satisfy the RMD requirement before converting dollars to a Roth, but first things first). 

[SJH57]

@dmertz @NCperson @rjs 

thank you all so much for the responses 🙂
yes, correct, dmertz, the state sponsored pre-tax employer plan is a 457b, not 479b.

It makes sense to rollover the entire amount to my fidelity traditional IRA and delay converting the acct to my Roth IRA until my taxable income is less, and move the money over in yearly installments to minimize my tax liability.

[NCperson]

@SJH57 - and not only minimize your tax liability, but minimize the hit by IRMAA as well (it's a stealth tax!) 

[Opus 17]

Be aware also, that while you may have limited investment choices in an employer sponsored plan, those investments may have lower fees and expense ratios than the same investments when privately held.  That can lead to higher returns if you leave money in the employer plan.  

(In other words, the ABCD mutual fund might have an investor class with expenses of 1%, and an institutional class that has 0.25% expenses.  The employer plan can buy the institutional class but in your private plan you can only buy the investor class.  You net more growth over time with lower expenses.)