Suze Orman Calls This $1.6 Million 401(k) Rollover Move ‘Crazy’ — What She Recommends Instead

Financial expert Suze Orman strongly advised against a retiree's plan to convert a $1.6 million pretax 401(k) to a Roth 401(k) and then a Roth IRA, funding the substantial tax liability directly from the 401(k). Orman clarified that such a move constitutes a taxable conversion, not a rollover, triggering immediate income taxes on the entire converted amount. Instead, she recommended converting smaller portions, such as $100,000, to a Roth IRA and paying the associated taxes from personal savings, emphasizing that taxes are unavoidable in a conversion.

Analysis

Financial expert Suze Orman strongly cautioned against a retiree's strategy to convert a $1.6 million pretax 401(k) into a Roth 401(k) and subsequently a Roth IRA. Orman labeled the plan, which involved funding the significant tax liability directly from the 401(k), as "crazy" due to its immediate tax implications.

Orman clarified that such a move constitutes a taxable conversion, not a simple rollover, triggering income taxes on the entire converted amount in the year of conversion. She emphasized that money in a 401(k) is pre-tax, making any conversion to an after-tax Roth account subject to current income tax.

Instead, Orman recommended converting smaller, manageable portions, such as $100,000, to a Roth IRA and paying the associated taxes from personal savings. She also highlighted the IRS's five-year rule for Roth IRA earnings to be tax-free, noting that early withdrawals could be taxable and subject to penalties if the account is newer than five years.

Key Decisions for Investors

• Investors considering large-scale Roth conversions should consult a tax advisor to understand the immediate and long-term tax implications, especially for substantial pre-tax balances.
• Evaluate the feasibility of paying conversion taxes from non-retirement savings to avoid further reducing the principal of the converted amount.
• Be mindful of the IRS's five-year rule for Roth IRA withdrawals to ensure tax-free earnings, particularly when rolling over funds from a Roth 401(k) to a Roth IRA.