Craig Wear, CFP® warns viewers to be cautious when converting a 401(k) to a Roth IRA. He explains that conversions trigger immediate taxation on the converted amount and argues that the decision depends less on current vs. future tax rates and more on the large tax consequences from required minimum distributions (RMDs) if funds are left in. He advises knowing the numbers before converting.
Be careful converting your 401k. Here's the math. You're going to pay taxes now on the whole amount that you convert. And if you pay a tax rate that stays the same in retirement, you maybe don't have a whole lot of gain if the taxes go down and you lose money. And if taxes go up, then yeah, it can help. That's what a lot of people think. But actually your decision to do conversions has very little to do with tax rate now versus tax rate later. It has more to do with the massive amount of taxes that those required minimum distributions are going to throw into your life life if you don't get the conversion. So don't listen to the naysayers, don't listen to the people tell you that the math says the only reason you should convert is if taxes are going to be lower in the future. That's a one dimensional approach and they have totally missed the point of looking at all the other costs that are going to accrue because you left the money in for too long. So bottom line, know your numbers before you make the switch.
