Should I convert my 401K to Roth IRA ? I lost 85K in 401K this year (paper lost) and lost 35K in stock market ?

mu annual gross income is about 75K

Only if you don't work at the same place anymore. Otherwise no.

If you are no longer working at the company that holds the 401K, yes, you can roll it to an IRA (tax free rollover) and then some or all of the money to a ROTH (taxable, but no penalty). The losses mean that you will have less to pay tax on--but you will owe income tax.

If you expect the investments to rebound, go for it.

Conversion of a 401K to a Roth IRA results in a taxable event. You will be taxed on the amount you convert which will be ordinary income added to your other total income. After conversion,the Roth IRA will then grow tax free. To answer your question, answer the following questions:

Will investments in the 401K come back in value following market stabilization?

Can I afford the additional taxes from the conversion?

What do you anticipate the growth rate will be asset held in the Roth and how long based on anticipated growth rate will it take to recoup the additional taxes you will owe from the conversion?

Based on your $85K loss in the 401K, you probably have a remaining balance on $85K. The market has suffered a 50% Loss in this latest bear market. You could offset the taxes on the conversion from the $35K lost in the stock market. The estimated 85k in the Roth IRA would then grow tax free.

You cant convert it unless you are no longer working for that employer. But if you are no longer working for that employer and you do roll it over, then contribute to it, you lose the opportunity to roll it back into another employer retirement plan in the future. Keep it where it is if you can.

If you still work at the place, or otherwise have some control over the funds in your 401K, look to find the most conservative fund, usually a money market fund, not based on stocks at all. It should be making a modest percenage, 4%-5% a year, but it's better than losing it in the stock funds.

If you don't work there anymore, you can roll it over tax free into a "Rollover IRA", where you will have substantially better control of the stocks or funds you are invested in.

Grandpa

In my opinion there are two question in there.

The first question is: "Is this is the best time to convert"? Technically the answer to that is yes. With the market down so far it will likely be the least expensive time to convert. And income tax rates almost *must* go up as the government can't keep producing these horrific deficits as in this decade. So yes this is the best "time" to do it.

The second question is "Should you convert?" That one is more complicated.

If you think your income will be higher in retirement than now, then the answer is yes. But that is very rare. The taxes generally are low on the 401(k) withdrawals in retirement because people lose their working income.

If you are rather young and have decades to benefit from the tax free compounded growth the answer is more likely yes.

If you are older and have less time to benefit from that growth the answer is no. It would take many years for the Roth to overcome the money lost to taxes on the conversion. Where that break even point depends on the tax rate applied to the conversion. Otherwise in the 401(k) you benefit from the money growing pretax rather than paying to convert to the after tax Roth and growing less money but tax free.

I have read unless very young or unless you will have a high expected retirement income from major investments, a business, or other sources, then a Roth does not make sense for most people.

People like the idea of "tax free" withdrawals but the numbers rarely work better over "pretax compounding" since in retirement most people have very little income and thus very low tax rates.

Good Luck.

One other consideration. Your tax rate matters, not your gross income when converting. It make a big difference if you are paying 10%, 15%, or 25% on the conversion. Isn't it taxed at your personal income tax rate?

The market is down about 50%. If your conversion is taxed at 25% you are left with 37.5% to reinvest. When the market hits a new high again it has to double to get back there. But if you reduce the amount invested you will have 75% of what you would have had if you left it alone. It would take many years of growth after that to make up that difference of paying taxes now over growing the 100% and paying the taxes later.

On that basis I think it is a bad idea and the best idea for most people is to max out their contributions for the next couple of years with the market down so far. Buy low.

Converting a 401k to a Roth IRA is pretty much like trading an apple for an apple.

I know it's tough... and everyone keeps saying it... but hold tight and the market is bound to come back up. Don't try to time the market... it doesn't work.

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