The ‘Brilliant’ Roth Rollover Advice You Shouldn’t Take Without Getting a Second Opinion
Written by
Laura Bogart
Edited by
Kristen Mae
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As more people look for ways to boost their retirement savings, offering advice for how to save big for a better future has become a major cottage industry. New trends in thought emerge at the speed of a social media post. One of the most recent trends involves rolling your 401(k) into a Roth IRA.
The logic goes a little something like this: When you’re changing over to a new job with its own 401(k), instead of rolling your old 401(k) into your new one, you could move it to a Roth IRA. Yes, you’ll pay taxes upfront on the rollover, but the benefit is that your gains will grow tax-free — and you won’t have to take required minimum distributions.
However, like any financial advice, there’s no such thing as one-size-fits-all. This isn’t a move to make lightly. There are a number of reasons why you shouldn’t attempt it without consulting a financial expert.
1. The Tax Hit Could Be Bigger Than You Expect
Sure, your gains will grow tax-free once you’ve put them in your Roth IRA, but that doesn’t mean the upfront tax bill from the rollover will be easy to manage — especially if your 401(k) balance is on the larger side.
You’d be paying taxes now on the entire pre-tax 401(k), which could result in a hefty surprise at tax time.
In some cases, the added income might even push you into a higher tax bracket for the year. That’s a lot of financial friction for a single money move, particularly if you’re not prepared for it.
2. Your Investment Options Could Change
If you’re satisfied with the investments that are offered in your existing 401(k), you might be disappointed to find that they aren’t available in a Roth IRA.
Your 401(k) might give you access to lower-cost, institutional-class funds — ones that aren’t always available in a Roth IRA. Before you move your money, make sure you’re not giving up access to investments that are working well for you or come with lower fees.
3. You Have More Legal Protection With a 401(k)
Ideally, you’d never have to contend with bankruptcy, collections, or creditor claims — but life isn’t always ideal. Money held in a 401(k) is protected under the Employee Retirement Income Security Act from nearly all kinds of creditor judgments, barring IRS tax liens or some spousal or child support orders.
IRAs, including Roth IRAs, don’t offer the same level of protection. While the Bankruptcy Abuse Prevention and Consumer Protection Act shields up to $1 million in combined IRA assets in bankruptcy proceedings, the level of protection you’d have against other kinds of judgment can vary between states, and are often weaker than what 401(k)s provide.
If asset protection is a concern, keeping your 401(k) in place or rolling it over to another 401(k) might be the safer option.
4. It Could Complicate Early Retirement
One of the biggest reasons not to roll money from a 401(k) into a Roth IRA is that you may lose flexibility if you plan to retire early.
With a Roth IRA, you can withdraw your contributions at any time, tax- and penalty-free — but not your earnings or converted funds. Withdrawing those before age 59½, or before the account has been open for five years, could result in a 10% penalty plus taxes.
By contrast, if you leave your job at age 55 or older, many 401(k) plans allow you to withdraw funds without penalty, thanks to the “Rule of 55” — depending on how your employer has set up the rules. Rolling that money into a Roth IRA means you lose that option. Be sure to understand the trade-offs before making the switch.
Bottom Line
Deciding what to do with a 401(k) after leaving a job can be complicated. While rolling it into a Roth IRA might make sense for some people — particularly those in lower tax brackets or with smaller balances — it’s not a blanket approach.
Before making any major financial move like this, talk to a qualified tax professional or financial advisor who can help you understand the costs, risks and long-term implications.
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