‘Absolutely crazy': Suze Orman skewers a caller's $1.6 million retirement rollover plan. Here's how to avoid the trap

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Settling into your retirement is a dream for many, but knowing exactly how much you need can be a lot trickier. Some Americans think they need $1.46 million — that's according to Northwestern Mutual (1). Meanwhile, Schroders places that number at a slightly lower, but still substantial, $1.2 million (2).

So when Gina, a 56-year-old retiree with a $1.6 million pretax 401(k), wrote into Suze Orman's Women & Money podcast (3), about an in-plan rollover for her retirement plan, you might assume that everything went smoothly.

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Instead, Orman responded with shock: "With the utmost of respect to your benefits person at the place that you used to work — are you crazy? Really? I don't know how else to say it."

Orman's issue came down to what Gina planned to do with her nest egg. At the recommendation of her former employer's benefits department, Gina was planning on rolling her $1.6 million pretax 401(k) into first a Roth 401(k) then a Roth IRA.

Orman explained that converting a pretax 401(k) to any Roth account would trigger a taxable event, as you're moving funds from a tax-deferred account to a tax-free one.

Shuffling accounts, as it turns out, isn't the tax loophole Gina thought it to be.

Orman was quick to point out that this wasn't a rollover, it was a conversion.

"You are converting from a pretax account to an after taxed account. So guess what, my dear Gina?" Orman said. "You owe income taxes at that point in time for that year's income tax."

Instead, Orman recommend that Gina take $100,000 out of her pretax 401(k), and put it into her Roth IRA — paying the taxes as usual. Simply put, there's no way to get around the taxes. Moving it all at once will just trigger an even more substantial taxable event. Orman also pointed out that a Roth IRA can only dodge taxes if it's existed for a minimum of five years from the time of its first contribution.

The takeaway? Retirement strategies can be tough to flesh out, and you don't always get the best advice from your employer.