YOU ASK:

Can I do a 401k rollover to Roth IRA?

WE ANSWER:

If you wish to take advantage of the benefits that a Roth IRA offers, you might be eligible for converting to a Roth IRA directly from your employer's retirement plan. As of 2006, participants in corporate retirement plans such as 401k and 403b are allowed to switch their balances to Roth IRAs.

Requirements for a 401k Rollover to Roth IRA

The IRS regulations for converting corporate retirement-plan, including 401k funds into Roth IRAs, can be summed up as follows:

  • Assets from company retirement plans, including 401k, 403b and 457b, can be directly rolled over to a Roth IRA.
  • All the funds rolled over to a Roth IRA must be included as taxable income for the year in which the conversion has taken place.
  • Modified adjusted gross income (MAGI) must not exceed $100,000, regardless of the status of the filed tax return. In addition, all married couples must file joint tax returns. Note, however, that both the above existing restrictions will be eliminated as of 2010.
  • Direct rollovers of assets to a Roth IRA are not subject to a 20 percent charge. However, 60-day rollovers still are. This is why the best thing would be to perform a trustee-to-trustee transfer.
  • If pre-tax assets are converted in a 401k rollover to Roth IRA, the pro-rata rule applies, providing that income tax is payable on any deductible pre-tax contributions. However, if the funds are converted after being taxed, the pro-rata rule does not apply.

Why Roll Over to Roth IRA

Converting a retirement plan, such as 401k, into a Roth IRA will be most beneficial to people who prefer paying taxes up front rather than having them deferred, or to individuals who want to allow the funds to build up without needing to withdraw them or make any early distributions.

Note that once you convert your 401k funds to a Roth IRA, an early distribution penalty of 10% applies if you withdraw from the Roth IRA funds within five years of the rollover, and if you are younger than age 59.5.

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