When rolling over your 401(k) is the wrong move

You're working and at least 70 1/2

Rolling over your 401(k) into a traditional IRA instead of a Roth IRA avoids paying your marginal tax rate on the converted amount.

Assuming that your marginal tax rate is higher in your working years, it’s better to incur the tax bill in retirement. Then, your income should be lower, bringing your marginal tax rate down and saving you a significant chunk of change.

If you’re 70 1/2 or older, this tax-avoidance strategy could be less effective than you hoped.

Traditional IRAs require you to start making withdrawals called required minimum distributions by April 1 of the year after you reach age 70 1/2, even if you’re still working.

That means you’ll pay your marginal tax rate on those distributions, just like you would have paid your marginal tax rate on the balance of your 401(k) if you rolled into a Roth.

If you keep the funds in your former employer’s 401(k), you may not have to start taking minimum distributions at age 70 1/2 as long as you’re still working and the plan’s rules allow it.