There may be one other issue when you do the rollover from your 401(k) — required minimum distributions (RMDs). If you are over age 72 and have left your company, you will be subject to RMDs from your 401(k) funds. Your RMD cannot be rolled over to your IRA or converted to your Roth IRA. That RMD amount would first have to be withdrawn from the 401(k) and only the balance would be available to be rolled over or converted.
As you can see, when you have funds in a company retirement plan like your 401(k), it's not as easy to do a Roth conversion as if you had the funds in your traditional IRA. But even with an IRA, if you are subject to RMDs, you still could not convert those RMDs to your Roth IRA. The main difference between converting your 401(k) and your own IRA is that the 401(k) is subject to company plan distribution rules, whereas with your own IRA you could easily withdraw or convert without going through the company's plan bureaucracy.
Q: I turned 72 this year. By when do I have to take my 2021 required minimum distribution?
A: Good question. Like everything else when it comes to RMDs, there's always a tax rule twist. This is one of those issues, but only for this year. Here's why. The SECURE Act raised the RMD age to 72 from 70 1/2, but only for those who turned 70 1/2 in 2020 or later. And then the CARES Act waived RMDs for 2020. This combination of tax rules creates a bit of RMD confusion for IRA owners who turned age 72 this year (like you) who want to know what the 2021 RMD rules are.
The general rule when it comes to RMDs is that you must take your first RMD by April 1 of the year following the year you turned age 72, so it seems like you would have until April 1, 2022, to take your first RMD.
But that is only the case if you turned 72 after June 30, 2021. If you were 72 earlier in the year, then you must take your RMD by Dec. 31, 2021. You don't get to use the April 1, 2022, date because that is only for your first RMD. If you turned 72 in the first half of 2021, then you are subject to the age 70 1/2 RMD rules because you turned 70 1/2 in 2019. Your first RMD was due by April 1, 2020, but the CARES Act relief law waived RMDs in 2020 (including those for 2019 that were delayed until April 1, 2020). Only the RMD for the first year can be delayed until the following April 1. Nothing is easy!
Ed Slott, CPA, is a nationally recognized IRA expert, public television personality, author and media resource who has dedicated his life to educating Americans (and their financial professionals) on protecting retirement accounts from unnecessary taxes. His most recent book is The New Retirement Savings Time Bomb (Penguin Random House, 2021), Visit www.IRAHelp.com to learn more.