Before answering your question, allow me to define a few terms in your question.
What is a 401(k)?
A 401(k) plan is named after Title 26 Subtitle A Chapter 1 Subchapter D Part I Subpart A § 401 paragraph K in US federal law. By comparison to that mouthful, the term 401(k) that we all use seems succinct. The IRS offers a clear summary of a 401(k) retirement plan's basics:
A 401(k) plan is a type of tax-qualified deferred compensation plan in which an employee can elect to have the employer contribute a portion of his or her cash wages to the plan on a pretax basis. Generally, these deferred wages (commonly referred to as elective contributions) are not subject to income tax withholding at the time of deferral, and they are not reflected on your Form 1040 since they were not included in the taxable wages on your Form W-2. However, they are included as wages subject to social security, Medicare, and federal unemployment taxes. IRS Topic 424
The key point in the quote above is that 401(k) contributions are pre-tax. This means that for the purposes of calculating your income taxes, it is as if you earned less than your full wages, which lowers your taxable income for the year you earned the money. However, there is no free lunch. When you do eventually withdraw the funds from the 401(k) account — which is called a distribution in the tax code — you will pay taxes at your then-current rate. The expectation is when a person is in their 60s or 70s and presumably retired from full-time employment, they will be earning less and therefore be in a lower tax bracket. I cannot imagine any circumstances where a person would not contribute a 401(k) plan if an employer offers one.
Your question regards distributions and rollovers. Again, back to the IRS definition:
Distributions from a 401(k) plan may qualify for optional lump-sum distribution treatment or rollover treatment as long as they meet the respective requirements... Distributions received before age 59 1/2 are subject to an early distribution penalty of 10% additional tax unless an exception applies.
When a 401(k) participant is no longer employed by their employer, they may have the option to leave their funds in the employer's account where it is managed by the 401(k) administrator, or roll it into a traditional Individual Retirement Arrangement (IRA). A rollover of 401(k) funds into a traditional IRA have no tax consequences in the year the rollover occurs, although the employee who receives a rollover has a limited amount of time to deposit the check into an IRA account before the IRS considers it income in that year.
Traditional Individual Retirement Arrangement (IRA)
Just about anyone less than age 70½ and received taxable earnings as a result of working can set up a traditional IRA. Like a 401(k) a traditional IRA is funded with pre-tax money. In other words, putting $1,000 (to pick a round example amount) into an IRA will reduce your taxable income by $1,000. Like 401(k)s, traditional IRAs are a terrific investment container because the amount saved reduces the current taxes paid.
The distribution rules for a traditional IRA and 401(k) are similar. In comparison to a 401(k), the advantage of a IRA is the wage earner controls where and how the funds are invested.
You mentioned you have a Roth IRA. A Roth IRA varies from a traditional IRA in one big way: The contributions are post-tax. So is the difference between a Roth IRA and a basic savings account? All investment earnings are tax-free when you or your beneficiary withdraw them.
You may be wondering if a traditional or Roth IRA is better. The answer is complicated because the annual Roth IRA savings limit is larger than traditional IRAs for most people. Also, if you save in a Roth IRA for ten or more years, the tax-free earnings will be far larger than the amount saved in taxes. Also, the distribution rules for a Roth IRA are less restrictive than those of a traditional IRA.
However, this is not to say that a traditional IRA is bad and a Roth IRA is good — both are smart choices and picking one does not preclude using the other.
The rules for rolling existing retirement funds into a Roth IRA is more intricate than rolling 401(k) funds into a traditional IRA. You can roll funds from one or several Roth IRAs into another Roth IRA without doing what is called a conversion. You may rollover and convert existing 401(k), traditional IRAs, SEPs, SIMPLE IRAs, or annuity plans into a Roth IRA. Each of these accounts have different rollover conversion rules.
To rollover and convert a traditional IRA, you add the amount of the distribution from your traditional IRA to your gross income. The distribution is included in income on your return for the year that you converted it from a traditional IRA to a Roth IRA. See the IRS document Publication 590 for a more complete discussion of rollover and conversion rules.
Your Roth IRA Conversion and Distribution Questions
The correct answer to any tax question depends on each person's specific financial situation. A tax planner or tax attorney will look at your tax returns for the last two or three years, the income you earn from your business, your savings and investments, and your lifestyle, among other variables.
A tax planner will probably recommend you roll your 401(k)s into a traditional IRA. The management cost of the 401(k)s is probably being borne by your previous employers, but if you have control over the IRAs you can direct them into accounts of your choosing. A tax planner will analyze the cost/benefit ratio of moving the funds into Roth IRA. You mentioned you are 61, which is relatively young, and the actuarial tables indicate a man your age can expect to live another 20 years, and a woman 23 years. Therefore, it may make sense to convert the 401(k)s and traditional IRA into a Roth IRA, especially if you plan to operate your business for part of that time and it is a viable, profitable venture.
On the other hand, if you come from a long line of short-lived people or suffer from a chronic disease that will shorten your life expectancy, or if you do not plan to operate your business for very long, then it may be more prudent to roll the 401(k)s into a traditional IRA. In this scenario, you can minimize the tax impact by taking distributions from your Roth IRA to supplement your income first. After those funds are exhausted, then take distributions from your traditional IRA, which will be taxable at your present rate.
Again, which course of action to take will depend on your exact situation.
I hope that the information I have provided helps you Find. Learn. Save.