The IRA Shuffle: From 401(k) to Roth IRA
Now it's easier to slide money into a Roth
By Mary Beth Franklin, Senior Editor
From Kiplinger's Personal Finance magazine, February 2008
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Moving money from a 401(k) into a Roth IRA after you left a job used to be a Texas two-step: You had to transfer the assets into a traditional IRA first, then convert that to a Roth. Now you can waltz directly into a Roth.
In order to make such a conversion, your annual adjusted gross income has to be $100,000 or less, whether you're single or married. But come 2010, when the income-eligibility limit disappears, that move will get easier, too.
When you convert to a Roth, you'll owe taxes on the entire amount you roll over -- assuming you made all your 401(k) contributions with pretax money.
But a Roth conversion is still worth considering because all future distributions, including earnings, can be withdrawn tax-free after age 59 1/2, if you've held the Roth for at least five years. Plus, you won't have to take required minimum distributions from a Roth after 70 1/2, as you do with a traditional IRA. And your heirs can inherit the money tax-free.
But don't try this strategy unless you can afford to pay the tax bill with funds outside your 401(k). Tapping your retirement account to pay taxes would mean owing an early-withdrawal penalty if you withdrew the money before age 55. Even worse, you'd lose the opportunity for years of tax-free growth.
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Reader Comments (3)
Posted by: Ed at 09/02/2009 11:19:35 AM
My company's plan offers both 401(k) IRA and ROTH. The ROTH has only been available for the last 2 years. Last year I stopped contributing to the IRA and start the ROTH. I just read that in 2010 you can convert your from the IRA to the ROTH no matter your income. Our plan sdvisor said I can not convert the 401(k) IRA to the ROTH while I am still working for the company. Is this true or is this a plan limitation? Ed
Posted by: Mary Beth Franklin at 09/03/2009 12:29:51 PM
Dear Ed, hi, Mary Beth here, author this article. First let me clarify some terms. Your company offers both a traditional 401(k) plan and a Roth 401(k)--not an IRA.... that's for individuals. Your advisor is correct. As long as you continue to work for your company, you cannot (in most cases) convert your traditional 401(k)plan to an individual Roth IRA. YOu'll have to wait until you leave or retire to convert your retirement accounts to an IRA. (In some cases, you can take an "in-service" distribution once you turn 59 1/2 even while you're still working and roll over your retirement savings to an IRA, but you'll have to ask your employer if that's an option in your plan.) You can roll over traditional 401(k) assets to a traditional IRA tax free. And you can roll over assets in a Roth 401(k) to a Roth IRA without tax consequences. But if you want to convert a traditional 401(k) or a traditional IRA to a Roth IRA, you will owe taxes at your ordinary income tax rate on any amount you convert. The trade-off is all your Roth IRA distributions will be tax-free once you turn 59 1/2 AND the converted account has been opened at least five years. The current $100,000 AGI income eligibility limit for converting traditional IRA?401(k) assets to a Roth IRA disappears in 2010. I hope this helps you.
Posted by: Kar at 11/27/2009 06:28:28 AM
Hi, I have money left behind in my previous employer's 401k. I do not have an income for 2009 and 2010 - and still have some cash left too. Should I use my zero income status and move funds to a ROTH IRA?