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Roth IRA Rollover from 401k
Whenever you leave your job, you have a decision to make with your 401k plan. Typically, most people will initiate a 401k rollover to a traditional IRA. A common question that I’ve been getting lately is if you can roll over your 401k into a Roth IRA and how you do it. Or if you have been contributing to a Roth 401k…..then what are your choices? Let’s see if I can help you make “cents” of the situation.
If you like this article you may also like: 401k Rollover Options to IRA, 7 Common Mistakes When Rolling Over Your 401k, 401k Rollover Offers Wide Range of Benefits.
Roth IRA Rollover Rules From 401k
Reminder: You must be separated from your employer to roll your 401k into a Roth IRA. You CANNOT do this if you are still working for the same company and/or employer (unless your over 59 1/2).
Prior to January 1, 2008 you were simply not able to directly rollover your 401k into a Roth IRA. If you wanted to do so you had to complete a two-step process. (Keep in mind that this would also apply to old Simple IRA’s, SEP IRA’s and 403b’s, 457, and qualified pensions, too)
- Open a Traditional IRA.
- Convert the Traditional IRA to a Roth IRA.
Since you were a converting to a Roth IRA you had to follow the Adjusted Gross Income limits (had to be less than $100,000 for 2009). Of course, in 2010 these limits disappear. I say “of course” because I’ve already written a few posts on the topic.
Just because the law changes made it available to rollover into a Roth IRA doesn’t mean that you can do it. Doing so all depends on your plan administrator. For example, recently I had two clients who intended to roll their old retirement plans into a Roth IRA. One client had an old military retirement plan- Thrift Savings Plan (TSP) and the other had a old state retirement plan. Upon helping each of them complete the paperwork, I came across an interesting discovery. The TSP rollover paperwork had a box that you could mark if you wanted to rollover the plan into a Roth IRA (The instructions added to make sure you had a Roth IRA already established). The state retirement plan did not give that option. So the only option was to open a traditional IRA to accept the rollover then immediately convert it to a Roth IRA. If that seems like a hassle….it is. The state retirement plan is not the only one that I’ve encountered with this. Many 401k’s and 403b’s have had the same “No-Roth IRA Rollover” option. This option is supposed to be mandatory in 2010, but some still do it on a voluntary basis.
Recap on Roth IRA Conversion Rule 2010
For 2009, you and/or your spouse are limited to $100,000 AGI to do the the Roth IRA conversion. That also applies to converting from a 401k, as well. In 2010, anybody will be able to take all their traditional IRA’s and old retirement plans and convert them to a Roth IRA. The amount you convert will be taxed, but you can spread the bill over three years. (The tax would be deferred in 2010. Then 50% would be paid in 2011 and the rest in 2012.)
How Do I Rollover if I Receive the Check?
If you receive a distribution check from your 401k rollover to a Roth IRA then chances are they will hold around 20% for taxes. If you want a direct 401k rollover to a Roth IRA, you may want to send that check back to your employer 401k provider and ask to be sent all of your eligible retirement distribution directly to your new Rollover IRA account (not as a check, or they will just give you 80% again). You have 60 days upon receiving the check to get the money into the Roth IRA- no exceptions! So don’t procrastinate on this one.
What About the Roth 401k?
If you employer offers a Roth 401k and you were savvy enough to take part, the path to a rollover is that much simpler. No need for a conversion here. You would simple just roll the Roth 401k directly into the Roth IRA. That’s what I call “simply satisfying”.
You Can Rollover Your 401k by Following These Steps
- You have to have a Roth IRA open/established before you can do any of this.
- Don’t forget about the AGI limits if you are doing this in 2009.
- Rolling from a traditional 401k to a Roth IRA will be a taxable event.
*Restrictions, penalties and taxes may apply. Unless certain criteria are met, Roth IRA owners must be 59 1/2 or older and have held the IRA for 5 years before tax-free withdrawals are permitted.
Securities offered through LPL Financial, Member FINRA/SIPC
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One important point – If first rolled into a traditional IRA, the amount then converted to Roth may not be 100% taxable. It becomes pro-rated along with any post tax money that may exist within the IRA. As I’ve included in many of my posts, regardless of the number of accounts one has, the IRS views you as having one (Traditional) IRA, comprised of pre-tax and , perhaps post-tax money.
As always, a great post, Jeff.
Joe
JoeTaxpayer´s last blog ..My Blog Reading This Week
Hi Jeff,
I read this article on Bloomberg about converting a a traditional IRA to a Roth IRA. I am interested in your thoughts on this. Thanks, Donna
http://www.bloomberg.com/apps/news?pid=20603037&sid=aY_JfvCUQzzU
@ Donna
Interesting insight. There may be some merit to it, but I think it underestimates the buzz that high net worth individuals have for wanting a Roth IRA. Not just from their investing standpoint, but from an estate planning standpoint as well. Plus, it did really emphasize the deferral period on paying the tax in 2010. By no taxes being due in 2010, and then the rest being split over the next two years; that’s a huge tax advantage. Ultimately, time will tell. And that time is just around the corner. Thanks for sharing the article!
I am 68 yrs old-in 98 I took an early retirement as the company I worked for was moving out of state. I did not touch my 401k account. I am now considering moving it to an IRA/Roth IRA-You mentioned some changes are to be made in 2010 concerning tax to be paid- also how do the IRA’s work-are they controlled by the stock market or is there flat interest rate?
@ Margaret
Please check out my post on doing a Roth IRA Conversion to answer your question about the tax benefit from converting. As you’ll read, you still have to pay the tax, just in 2010 you can defer the amount and spread it over the next two years. http://www.goodfinancialcents.com/2010-roth-ira-conversion/
Roth IRA’s are an just a retirement account or “shell” account that can hold any type of investment that you choose. Check out this post that I wrote that will help explain further. http://www.goodfinancialcents.com/best-roth-ira-rates/
Most years my families AGI is well above 100k. This year, due to unemployment, we will be around 70k. 2010 AGI will definitely be about 200K. I have old 401ks of about 250K. So my question: Does the AGI limitation of 100K for 2009 include the potential increase in AGI due to the 401K to Roth IRA conversion? I know I could wait until 2010 and split the tax liability over two years, but my AGI will be much higher in those years compared to 2009. My wife and I are 35 and 38 respectively. Thanks for any help.
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