‘You have far more investment choices’: Suze Orman to a caller trapped in a $114,000 lump-sum 401(k) rollover

A caller named Kelly phoned into Suze Orman's Women & Money podcast with a problem thousands of job-changers hit every year. Her old employer offered only a traditional 401(k), where she has built up $114,000. Her new employer offers a Roth 401(k), which she plans to fund going forward. The catch: the old plan will only release the money in one lump sum, not in slices.

Rolling $114,000 from a traditional 401(k) directly into a Roth account in a single move would trigger income tax on the full balance in one tax year. For a mid-career earner, that can push part of the conversion into a higher federal bracket and inflate the state tax bill. Kelly's question to Orman was blunt: "I do not want to pay taxes owed on the $114,000 all at once. Is there any other way to do this?"

The Verdict: Two Paths Exist, and One Is Better

Orman's advice is sound. The forced lump-sum distribution and a forced Roth conversion are separate events. What matters is where the money lands. If it lands in a traditional (pre-tax) bucket, no tax is owed on the transfer. The conversion to Roth can then be paced across multiple tax years to manage the bracket hit.

Path One: In-Plan Route

Kelly would ask her new employer whether their plan offers a traditional 401(k) sleeve and, critically, whether it allows in-plan Roth conversions. "Make sure that they allow in-plan conversions so that within your new employer's plan you can convert little by little to the Roth 401." The lump sum lands pre-tax, no tax bill in year one, and Kelly then converts, say, $20,000 or $30,000 a year until the balance is fully Roth.

A single filer earning $90,000 who converts the full $114,000 in one year lands most of that conversion in the 24% federal bracket, with a chunk pushed into 32%. Spread the same conversion across five years at roughly $22,800 a year, and the bulk stays inside the 22% bracket. Same total dollars converted. Materially lower total tax paid.

Path Two: IRA Rollover Route

Orman's stronger recommendation was to roll the old $114,000 into a traditional IRA rollover, then convert piece by piece into a Roth IRA over several years. Her reasoning centered on investment choice. "By doing that, you have far more investment choices that you can make. You can do Treasuries, ETFs, individual stocks, all kinds of things."

Inside a typical employer plan, the menu is usually a dozen or so mutual funds plus maybe employer stock. Inside a self-directed IRA, the menu is essentially the entire public market. Right now that includes a 10-year Treasury yielding about 4.5% and 52-week T-bills yielding roughly 4%, both of which most 401(k) menus do not let a participant buy directly. The national average 12-month CD sits near 1.7%, so the ability to buy Treasuries inside an IRA matters for the conservative slice of a portfolio.

The Variables That Decide Between Paths

The factor that tips Kelly toward the IRA route is her income trajectory. If Kelly's income is not so high that it phases her out of contributing directly to a Roth IRA, the IRA rollover path is cleaner and more flexible. If her income is likely to climb into the phase-out range, holding the money inside a workplace Roth 401(k) sidesteps the pro-rata rule that can complicate backdoor Roth contributions later.

The other variable is the new employer's plan quality. If that plan carries high expense ratios or a thin fund lineup, the IRA route wins on cost alone. If the plan offers a strong low-cost index lineup and in-plan Roth conversions, path one is perfectly acceptable.

What Kelly Should Actually Do

1. Call the new employer's plan administrator and ask in writing: does the plan accept incoming rollovers into a traditional 401(k) sleeve, and does it permit in-plan Roth conversions on a partial basis.
2. If either answer is no, open a rollover IRA at a low-cost brokerage and initiate a direct trustee-to-trustee transfer of the full $114,000 from the old 401(k). Direct transfer avoids the mandatory 20% withholding that hits an indirect rollover.
3. Model the conversion in slices. Pick an annual conversion amount that keeps taxable income inside your current federal bracket. Convert that amount each year until the traditional balance is drained.
4. Pay the conversion tax from outside funds, not from the converted balance. Paying tax from the IRA itself shrinks the amount that gets to grow tax-free.

Orman's closing point to Kelly framed this as manageable. The forced lump sum from the old plan is simply a paperwork constraint. Route the money to a pre-tax destination first, then convert on your own schedule.

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