Suze Orman, a prominent financial expert, recently tackled a complex retirement strategy proposed by a listener on her Women & Money podcast. The listener, Gina, a 56-year-old retiree, sought advice on rolling over a hefty $1.6 million sum from her pretax 401(k) into a Roth IRA over a ten-year period without dipping into her liquid savings to cover the taxes. Gina had been advised by her company’s benefits advisor to follow a series of steps that seemed feasible at first glance but raised concerns for Orman, who didn’t hold back in her response.
Here’s why Orman believed Gina’s retirement strategy was fundamentally flawed:
- Gina planned to convert $100,000 from her pretax 401(k) to a Roth 401(k) and then to a Roth IRA, covering the conversion taxes by withdrawing $40,000 from her 401(k) and having her company withhold the entire amount for taxes.
The fatal flaw according to Orman: any conversion from a pretax 401(k) to a Roth IRA triggers an immediate tax liability. Shuffling funds between different retirement accounts doesn’t negate this tax event.
Orman recommended a different approach for Gina:
- Convert portions of the 401(k) into the Roth IRA directly, paying the taxes from savings.
- Opt for smaller annual conversions while ensuring that tax liabilities are covered with funds outside the 401(k).
The key takeaway from Orman’s insight is simple – attempting to circumvent tax obligations when converting funds between accounts is a risky and impractical endeavor. Understanding the tax implications before making significant financial decisions is crucial for a secure retirement.
In the grand scheme of retirement planning, the appeal of Roth conversions cannot be denied, promising tax-free growth and withdrawals during retirement. However, attempting to outmaneuver the tax system without proper knowledge can lead to costly missteps. Seek guidance from a trusted financial advisor to navigate complex retirement strategies effectively.
Gina’s predicament serves as a valuable lesson – even the most well-intentioned plans can go awry without a solid grasp of tax laws. Take the time to understand the taxation principles behind retirement accounts before making substantial financial moves to avoid unintended consequences.
Ultimately, when it comes to financial planning, knowledge is power. Seek professional advice and make informed decisions for a secure financial future. Remember, a well-informed strategy can be the difference between financial success and costly setbacks.
