Can You Rollover Your 401k to a Roth IRA?

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 then how you do it?”

401k rollover into Roth IRA

Whenever you leave your job, you have a decision to make with your 401k plan.

A variation to that is 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. Here’s how you roll over 401k into a Roth IRA.




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)
Rollover 401k to Roth IRA

  1. Open a Traditional IRA.
  2. 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 disappeared.  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.

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

Starting in 2010, anybody was 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 it still can be an attractive move for those that feel that taxes are going nowhere but up.

How Do I Rollover if I Receive the Check?

401k rollover into roth ira
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”.

How You Can Rollover Your 401k by Following These Steps

    1. You have to have a Roth IRA open/established before you can do any of this..
    2. Rolling from a traditional 401k to a Roth IRA will be a taxable event
    3. Enjoy the tax free growth of your Roth IRA!

3 Brokerage Options to Rollover Your 401k Into a Roth IRA

If you plan to rollover your 401k into a Roth IRA you will need to open a brokerage account.

Here are two other great options for you to consider for your 401k rollover:

Scottrade

With over 500 branches across the country, Scottrade is one of the best options for you to rollover your 401k into a Roth IRA. Not only do they have a great brick-and-mortar presence, but you can do everything online as well.

Whether it is $7 trades, no account maintenance fees, or the fact that they won’t charge you if you close your account to take your business elsewhere, I absolutely love Scottrade.

I like the company so much I opened an account there myself and made a video walking you through the process of opening a No Fee Roth IRA with Scottrade.


E*TRADE

A close second for me is E*TRADE because they also have 30 brick-and-mortar locations while maintaining one of the best online trading platforms available.

Their commission structure is competitive with the industry for stocks and ETFs, and they don’t hit you hard on mutual fund fees.

Plus, if you open up an account with E*TRADE you get free trades for 60 days and up to $600 depending on the size of the 401k you are rolling over to the company. Free money for opening an online stock broker account? I’ll take it.


We also maintain a full list of the best places to open a Roth IRA.

Brokerage firms are willing to give you cash sign up bonuses (or airline miles) for opening an account with them. If you are looking to get a sign up bonus for opening an online stock broker account, don’t miss out on a big sign up bonus.

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Comments | 80 Responses

  1. Jim says

    I am thinking of rolling my 401k balance into a ROTH IRA account which I already have established. In this article you mention that this is a taxable event. As an accountant myself I understand the reasoning behind this, however I am wondering what the actual tax implications. For example if I want to roll a $50k 401k balance into a ROTH IRA, and my salary is under $100k, what will be the taxable amount that I can expect to owe the government? Also, can you please show me the calculation that you would utilize so I can use my actual balance to repreform this calc?

    Thanks so much.

  2. Joel says

    Hi Jeff,
    My wife never set up a Roth IRA and now that we got married, we make too much for her to contribute to one. I’ve set up her Roth 401(k) at work and she’s contributing there. If she leaves the company, can she roll the Roth 401k into a Roth IRA? In other words is the income limit just restricting contributions or rollovers/plan eligibility as well?
    Thanks!

  3. Bill says

    Jeff,
    My company just got acquired by a larger company and they said next year we will be converting from our current 401k plan to the new companies 401k plan. Will this be an opportunity to convert my 401k to an IRA or will I be forced to roll it into the new plan since my employment continued?

    • says

      I have a similar question. We were purchased by a larger company last year and just recently moved to their 401k. However, I still have funds in the old 401k.

      I’d rather move them into a traditional IRA where I have a broader selection of funds to choose from.

      • says

        @ Mr. Tob

        Great question. And to be honest….I’m not sure.

        My hunch is that you’ll be able to, but I think it depends on how the company was acquired. I would contact both your old 401k plan and a representative from you new plan to see what they suggest.

  4. says

    Very interesting stuff! I had no clue you could rollover a 401k into a Roth IRA . . . now if I could only remember to pay the taxes on it. No worries, I will!

    I’d be interested to find out why so many brokers still recommend doing a 401k to IRA to Roth IRA. Hmmmm…

  5. says

    Unless the balance is pretty low, I recommend the two step. The converted amount is added to you taxable income and there’s a good chance it will throw you into the next bracket.
    For example, in 2012 a taxable $70,700 starts the 25% bracket. So if you have say, $50,000 taxable, converting $20,700 will be all 15% , but above that is taxed at 25% (or higher if it’s a lot of money).
    The partial conversion each year lets you control the taxes. Ideally, you may topoff the 15% bracket every year until all converted.

    On a lighter note, if you convert $100K and the market tanks, you can recharacterize, in effect, a rare financial do-over. You still lost money, but aren’t hit with the tax on the pre-tank amount.

  6. says

    Before rolling over your 401k it is important to know your options, as well as any fees that you may be faced with. I have seen so many young to middle aged people faced with financial dis pare that they are comparing 401k cash outs vs. 401k loans and they never really learned how to properly monitor your 401k account to begin with.

  7. says

    I have a Fidelity account where I rolled over a 401k from a previous job. This account is no longer in use and has a very small balance. After reading your article, I began to look into utilizing the account again, and contributing via EFT from my savings account. Excellent tips, thanks Jeff!

  8. Jessica Kaisk says

    I recently got married and found that I have a retirement fund from when I worked at a university in OH. I want to roll it over, and some banks that I have talked to said they can help do that, but would it be a better bet to roll it into an IRA, or create a totally new savings and let it sit?

    • Jeff Rose says

      @ Jessica

      Roll into an IRA. You don’t need it now and might as well let it grow towards your retirement.

  9. Jackie says

    So I had a Roth 401K managed by Prudential and just rolled it into a Roth IRA at Fidelity. I was told that income tax will be withheld (20%) by Prudential for the earned amount of my Roth 401K (what contributions gained – not on the original contributions) with the rollover – is this correct?

    • says

      Absolutely not. Jackie – the only time there’s a 20% required withholding is when you withdraw from a 401(k). Direct transfers should never have taxes withheld as no tax is due.
      I’d call Prudential back and kindly ask them to explain again what they plan to do with what they held on to and ask for a supervisor if the rep you talk to doesn’t understand what’s going on.
      The growth in the Roth 401(k) gets transferred 100% to the Roth IRA, they got this completely wrong.

  10. ebonyh says

    I am trying to buy my first home. I recently was made aware I still had a substantial amount left in an old employer’s 401k. Should I transfer the balance to my new employer or should I open an IRA. I’m planning on using the money as a down payment on my first home.

  11. kristen says

    Hi, I know you said they’ll probably hold 20% for taxes if you get the funds from a 401k to rollover to the Roth IRA via check, but if they are able to rollover the funds directly to the Roth IRA, how much are you taxed?

    • says

      As Jeff responded, convert the full amount. On whatever paperwork you sign for the direct rollover, check “no tax withheld.”

      But, not to throw a wrench into your plans – I recommend a direct transfer to a Traditional IRA first. Do the math, i.e. look at your projected 2012 tax return and see what your taxable income is. Convert some or all, but be aware the tax is at your marginal rate, and a conversion may throw you into the next bracket. When you actually file the 2012 tax return, you can recharacterize (undo) some of the conversion to get it just right if you converted too much.

  12. Bud says

    I have a sizable 401k that I want to rollover. I have been separated from my employer since 2008. Per the plan adminstrator (Vanguard) approximately $57K of my contributions were after tax contributions. I want to rollover the pretax into a regular IRA and the after tax contributions into a Roth. Can I also roll the earning from my after tax contributions and how do I determine that amount? Must I use the existing Roth I have with Prudential or can I open a new one. I plan on leaving my regular IRA with Vanguard

  13. Leon says

    Hi Jeff,

    After reading this, it has come to my attention that isn’t this a way to get an egregious amount of money into your IRA since the yearly cap is a maximum of $5,000 you can contribute?

    Let’s say I’m young and I am saving the maximum (I believe around $17,000) in a 401k. Let’s say that after 1 year that hypothetically the $17,000 sits in my 401k and doesn’t grow.

    If I leave my job after 1 year, I can roll that $17,000 into a Roth IRA, have it taxed at let’s say 30% which leaves me with $11,900 in a Roth IRA.

    Since I am normally only allowed $5,000 of contributions a year, I’ve effectively just placed 3 years worth of funds into a Roth IRA, of which I can let grow and withdraw tax free at 59 1/2.

    Is this plausible?

    • says

      @ Leon It sure is. Don’t discount the 30% tax hit though. You would have to make up serious ground in your investments to make up for it even if it is tax-free at retirement.

  14. peacelovedogsdogslovepeace says

    I left my employer in 2010 due to cancer. I currently have my 401k from them sitting in an account waiting to be moved.

    My question. If I were to use a portion of the money and put the rest into an IRA….say I had $50,000 and used $5,000 so deposited $45,000. How much would I be taxed on?

    I have to use a portion of this money. It looks like I have no choice so I am trying to find a way to make it least financially wounding.

    Thank you in advance!

    • says

      If you were 55 or older on separation from the employer, there would be no penalty for 401(k) withdrawals, just the tax.

      From an IRA, there’s no penalty if you are 59-1/2 or older, or if you are considered disabled.

      Before any IRA withdrawal, look at your tax situation, understand exactly what you’d pay in tax for any money withdrawn. Money is precious at this time in your life, better to pay 0% or 10% than 15% for the sake of choosing to withdraw in the wrong month, or withdrawing just over that next bracket. Read Jeff’s articles here on marginal rates, standard deduction/ exemptions. Knowledge is power, and I’d like to see you minimize your tax bill. Zero is ideal.

  15. John says

    I have a 401k from a former employer. There are pretax and after tax portions. I would like to transfer the after tax portion to a Roth. My former employer would roll the after tax amount to my Roth IRA and the amount earned on the after tax amount to my regular IRA. Am I correct in assuming that these would be a tax free transactions?

      • Kevin says

        I’ve done what John proposed. I,m wondering if it was legal considering your coment about not still working for the company “which i am” and having trouble figuring how to report it on my 1012 taxes . Please help.
        Details:
        Transferred 401K non-taxable “after-tax” Employee Contributions $70K to Roth IRA & “Pre-Tax” no cost basis funds $300K to Individual Retirement Annuity. How do I enter in TT?

        Vanguard sent separate Checks payable to the institutions “trustee-to-trustee transfer”, but lumped both payouts on one 1099R.
        The 1099R from Vanguard 401K shows Box 1 $370K, Box 5 $70K, Box 7 Code G.

      • Kevin says

        I got some guidance on how to report this type of transaction.
        I was afraid the IRS may want to pro rate the distribution instead of specific allocations.
        It seems strange that the IRS would not ask for proof of where the money went or track it.

        Kevin; How does IRS know which $ went to which accounts?
        TurboTax CPA ;They don’t. All they care is if you are properly reporting the transaction and if any portion is taxable, that you are reflecting that on the tax return.
        Kevin; Do I need to report the Annuity anywhere?
        TurboTax CPA; No. But the Roth IRA you need to enter on the worksheet to keep track of your basis. It is up to you to keep proper records in case ever questioned by the IRS.

        I would appreciate your comments on this Jeff. Thanks Kevin

  16. Anna says

    I’m in the same situation as ebonyh

    I’m not able to make hardship withdrawals because I’m no longer an active employee.

    If I withdraw from the 401k they hold 20% for federal taxes
    I dont have state taxes.

    But if I convert to an IRA, withdrawal limits for a house is 10k

    are there withdrawal limits on a Roth IRA?

    • says

      @ Anna

      If you were to convert into a Roth IRA, you would typically have a 5 year waiting period before you could touch the principle (the amount you converted).

  17. Darius says

    Hi Jeff,

    I still have $104K in my military TSP account. I grossed about $45K from military retirement pay this year and another $10K from job I just started…total gross income for 2012 should be about $55K. I was thinking that I should convert my military TSP to a Roth IRA before the year ends, because my gross pay will increase to about $150K next year.

    If I convert before this year will I be in the $159K Tax Bracket ($55K grossed + $104K TSP)?

    And I’m also guessing that if I wait till later to convert I will be in the higher $254K Tax Bracket ($150K Salary + $104K TSP )?

    How can I lower my tax bracket if I convert or should I not convert? (I have a house…that will help, but not nearly enough)

    • says

      @ Darius

      That is correct, your gross income will be the $159k; same goes for your assumption for the next year.

      The only really way to lower your taxes is to (ironically) contribute more to your TSP and then maybe also contribute to a retirement plan with the other job you have. Otherwise there are really no other options.

      Whether you should convert is a tougher question to answer this there is so much grey area. Factors to include: your age, your expected investment return within the Roth IRA, your view on future tax rates, when you actually retire, etc.

  18. Dave says

    I’m 61 now and have an active 401k at work. It’s a little unclear to me if you’re saying I could roll this (or a portion) into a Roth IRA now even while I’m still working (and contributing). I would like to do this to have more control over how the money is invested and to get started on the 5 year waiting period before I could withdraw from it.

  19. John says

    I have a Roth 401K from an old employer I am going to rollover to a Roth IRA. IS there a specific way to do this so that my contributions and earnings basis will still be known at the new Roth IRA. I woudl liek to be able to withdraw some of my contributions, but not earnings, from the Roth IRA pretty soon. IS this possible?

  20. Dan says

    I have pretax money in a 401k from an old employer. My wife and I together now make too much to contribute to a Roth IRA. Also, I now have a defined pension plan that I contribute to at work. Does the defined pension plan stop me from opening up a Roth and transferring the money from the old 401K? If not, I still cannot contribute to the Roth going forward, correct? (i.e. I can only make the transfer and just watch it grow tax-free without new contributions?)

  21. Bailey says

    I have a 401K with both pre-taxed and after-tax savings. I am no longer employed with the company. Considering converting to Roth IRA due to savings on deductions now. Total income is around 80K before we do anything. Will be adopting again next year and might need little extra cash too. Will I be taxed higher after 2012? Suggestions please!

  22. Hemali says

    Hello,

    Can I roll over my 401k to a Roth IRA today (trustee to trustee transfer) and pay taxes as part of 2012 since my income in 2013 will be significantly higher than my income in 2012?

    Can I contribute 5000 limit in addition to this rollover to this Roth IRA?

    Also, if I take money out from 401k will I be taxed 20% or my current tax rate?

    Thank you so much for the information!

  23. Chanel says

    Hi Jeff,

    I am 26 yrs old and have a little over 20k in my 401k with my company (who matches). I have two questions:

    1.) I am currently in the midst of starting a new job in Feb (this company does NOT match) should I utilize a ROTH IRA instead of contributing to their 401k?

    2.) Should I rollover my current 401k into a ROTH IRA?

    • says

      @ Chanel

      Congrats on getting a head start on your future. Keep it up! :)

      It’s tough to answer your questions, but here’s some initial thoughts that come to mind.

      1. How are the investments in your new 401k? If they are solid, I would lean that way. If not, go towards the Roth IRA. You could also do a combination of the two so that you have some pre-tax money and tax-free money. There really isn’t a wrong or right answer.
      2. When I left my old brokerage firm, I was about 30 years-old and had about $50k in my 401k. I knew without a doubt that I was going to do a Roth IRA conversion. For me it made sense; primarily because I’m a believer in the Roth.

      Hope that helps!

    • says

      @Chanel –
      Do you know what your marginal tax rate is? In 2013, a single filer is paying 15% to a taxable $36,250, above that is 25%, right up to $87,850, for what it’s worth.

      If you are near the 15/25% line, I’d move the money to a traditional IRA, and convert just enough to top off the 15% bracket each year. Keep in mind, you have an exemption and standard deduction that add to $10,000, and you might have some other write-offs as well.
      If you are already in the 25% bracket, I’d use the Traditional IRA to get down as close to $36,250 as I can.

      • Chanel says

        @Jeff Rose- Thanks for your feedback! It is greatly appreciated. The company I am starting with is a fairly new company and I am unsure of the state of their investments, I just know they don’t match. Being that I would no longer be able to gain the “free” dollars I once did with my company that currently does match, I was thinking about direct deposit into a Roth IRA account. I definitely have some things to think through now.

        @JoeTaxpayer- given my current situation, my gross pay for 2012 was 78k and I had taxable wages of 95k (I was given a relocation package). Based upon that, what are your thoughts?

        Again, I appreciate all the feedback available as I strive on this long-term journey to financial stability and freedom!

        • says

          First, when you run your 2012 return, if it was actually a taxable $95K, you hit 28%, and you are above the limit for a pretax IRA.

          One crazy rule to keep in mind – if you have a 401(k) plan at work, the IRA phaseout limits apply whether or not you deposit to the 401.

          For a single in the 25% bracket, I prefer the pre tax choice, as if/when you have a low income year (married, kid or two) you can use that time to convert.

          • Chanel says

            @JoeTaxpayer

            So if I am understanding correctly, are you suggesting I leave my current 401k where it is? Or roll it into a Roth IRA? As rolling it into a traditional IRA will not be an option for me. Excuse my ignorance on the subject matter, I’m actively learning about all of this.

      • Chanel says

        @Jeff Rose- Thanks for your feedback! It is greatly appreciated. The company I am starting with is a fairly new company and I am unsure of the state of their investments, I just know they don’t match. Being that I would no longer be able to gain the “free” dollars I once did with my company that currently does match, I was thinking about direct deposit into a Roth IRA account. I definitely have some things to think through now.

        • says

          You can roll a pre-tax 401(k) into a traditional IRA. That’s what I’d do. You can then decide when to convert it to Roth in the future.

          I have one major issue with an old 401(k) converting to a Roth. Say the market drops. There’s nowhere to recharacterize to (a fancy way to say ‘unconvert’) and you’re stuck. If you first move to IRA, and then choose to convert, you have some flexibility.

          • Chanel says

            @JoeTaxpayer. So will the money be taxed twice in that case? Once in the move to the IRA and another to the Roth IRA if I so choose? And I guess I may not have the option for the IRA based upon your last response.

  24. says

    Chanel – a transfer from like-status accounts produces no tax issue. i.e. a transfer from a pre-tax 401(k) to a traditional IRA results in no tax due. It’s only when a pre-tax flavor is converted to a Roth Flavor there’s a tax bill.

  25. Denise says

    Jeff

    I’m 62 and have an active 401k at work, I also have a Roth with another financial company that is now in it’s 5th year. I would like to start converting $6500 of my 401k to my Roth every year for the rest of my employment so I can start paying taxes on the pre-taxed 401K funds and move the funds trustee to trustee. I am fully vested. can I do this.
    thanks.

  26. James L says

    Hi Jeff. I lost my job in Dec 2011 and had left my 401k with my old employer until i heard the company was tanking and would either sell or fold. Because of this i decided to move my money until i could put it in my new company’s 401k. Unfortunately i guess i didnt do enough research and moved it into an ING Roth IRA. I guess i should have moved it into a traditional IRA because now I cant transfer it into my new 401k and I just got a 1099R to pay taxes on it ugh. I wish i just left it where it was but is there anything i can do to move it without paying taxes?

  27. says

    James –
    From an IRS Q&A –
    How can I recharacterize an amount rolled over to a Roth IRA from an employer-sponsored retirement plan?

    You can only recharacterize amounts rolled into a Roth IRA from an employer-sponsored retirement plan by transferring them to a new or existing traditional IRA, and not back into the plan from which they were distributed.

    Hopefully, you did the conversion in 2012, not 2011. If so, you are golden. You can recharacterize to a traditional IRA, and the result is the same as if you simply transferred the 401(k) to the IRA as you wished you had done.

  28. louis says

    i would like to know if this is my best option to reduce my taxes. i have 150k in an old 401k. i make less than 20k and i’m in the 15% tax bracket. i would like to have this in a roth ira. i would need to transfer the 401k to a traditional ira. then covert enough money to a roth ira, being careful not to enter the 25% bracket (roughly36k). so i could convert about 16k, right? also, i will be starting a new 401k. will the amount i put into the new 401k reduce my taxable income and can i transfer that difference as extra money from my converted ira into the roth ira?

  29. Sandy Thomas says

    I rolled my 401k (Pre-tax) to my Roth IRA. I rec’d a 1099-R showing the full distribution as taxable in Box 2a and Distribution Code “7”. This code indicates a rollover of Pre tax $$ from a qualified plan to a “traditional”IRA therefore when I filed my taxes using a tax software it doesn’t “tax”the amt shown in box 2a. Shouldn’t the distribution code be “2” so that the software will recognize that I owe taxes and prep my taxes correctly? I know I owe these taxes and if I ignore the fact that my 1099-r wasn’t done correctly, I’m sure it’ll catch up w/ me eventually.

    Thanks for your thoughts,
    Sandy

  30. Keith says

    I am 42 and recently left my former company and am looking at rolling my Fidelity 401k into an IRA. The current amount is 260k and my contributions were all before-tax dollars. From the research that I’ve done so far, it looks like my best options at this time would be a Traditional IRA (because I don’t have the funds to pay taxes right now out of pocket) or possibly a Solo 401k as I am now self-employed. It is a partnership and the only other “employees” are my self-employed partners. If there would be a possibility of actual employees down the road, would that rule out the Solo 401k now? And if I went the Traditional IRA route now, could I convert that slowly into a Roth IRA by paying the taxes out of pocket in smaller amounts? Any advice would be greatly appreciated.

    • says

      Hi Keith. Congrats, first, that’s a nice chunk of change, and I’m glad you’re carefully reviewing your options.
      There are pros and cons to either choice. If the Solo 401 doesn’t have a Roth option, the slow conversion you suggest may not be possible. Based on that, the flexibility the IRA transfer gives you may make this option the right one for you.
      Note – even if the 401(k) offered a Roth 401(k) side for conversions, the ‘recharacterization’ is not available. For someone in your situation, I suggest a bit of strategic planning. If you think you wish to convert $20K this year, open two Roth IRA accounts, convert a different asset into each one. Next year, recharacterize the one that underperformed. Unless they both went down in value, in which case, you might reverse both conversions. (Of course, if they both shot up in value, you might wish to leave both converted. Nice to pay tax on $20K, but see $30K in the Roth account)

  31. michelle says

    HI,

    I have an exiting 401k from both my ex employers and wanted to convert it to a roth ira. Is there a fee involved on this?? Also, do I need to open a traditional ira first then transfer to a roth ira? Please help me

  32. Buck says

    A person has a Roth 401K from his previous employer that contains contributions and gains from an employer match that he is vested in. He wants to rollover the entire account to a Roth IRA. How are the employER matches and gains treated?

  33. Naomi says

    Hi. I am 64 earning approximately$86k; I plan to retire in 6 months for health reasons.

    Here are two scenarios I am looking at:

    1. Keeping 401(k) balance from my job after they take mandatory 20% for taxes. How much in taxes do you figure I would have to pay Uncle Sam when I next file my return?

    2 . Transfer my 401(k) currently worth approximately $165k to a Roth IRA, but keep around $25k before transferring to Roth. Will the $25k be considered salary and I would need to declare on my tax return? Unfortunately I could use the extra cash for bills. Thank you.

    • says

      Naomi – withdrawals from 401(k) or (traditional) IRA are taxed at your marginal rate. 25% for taxable income over $36,250 in 2013. The same tax is due when converting to Roth.
      I strongly suggest you do neither of these this year. 6 months puts you at the end of October. This year, transfer (directly to a broker, do NOT have the employer withhhold tax or send yo a check) the 401(k) to an IRA. That’s it.

      In Jan 2014 you start from zero income, and have a standard deduction and exemption adding to $10,000. So waiting till January puts the tax bill on a $46,250 withdrawal at $4,991, vs the $11,500 you’d pay this year.

      Last – if you don’t need that money, say you only take out $26,000. You can convert some more (up to $20K, staying with the numbers above) and it’s a 15% marginal tax bracket you’re in.

      Of course this answer depends on what other income you have, such as a pension, or investment income, etc. A generic nswer based on how much info you shared.

  34. shaun says

    I’m really confused about one thing here.

    Say I have $30k in a 401k and choose to convert to a Roth IRA.

    Do I end up with $30k in the Roth IRA and then pay taxes at the end of the year on $30k I converted.
    OR
    Do I pay taxes on the $30k I converted and end up with ($30k-tax bill) in the Roth IRA?

    To me that seems to be a pretty important distinction that nobody mentions.

  35. faith says

    If you rollover a 401k into an IRA is this amount subtracted from what you are able to contribute that year? So if I rollover my 401k next year if I leave my current employer, will I still be able to contribute to my IRA as usual up to the limit or will the rollover affect this?

  36. alex says

    Hi Jeff, I will be 67 in coming August and plan to retire as of August 1. I am an union member and have annuity account ($38,000), all money have been contributed by my current employer. Additionally I have 401k ($21,000) with my former employer. I already have established Roth IRA account for over 8 years. If I roll over annuity and 401k to Roth IRA what are the tax consequences. My 401k and Roth IRA accounts are held by the same bank.
    Thank you for your advice.

    • says

      @ Alex

      The annuity total plus your 401k total would be added to your AGI for the year and that’s how much tax you would pay. If you plan on doing this, I would wait until next year when you have no income from your current job.

  37. Myrtle Gallegos says

    I wanted to throw in a short blurb about the Roth 401k. While they’re a new animal (only around since 2006), they’ll likely become popular quickly. The differences between a 401K and a Roth 401K are nearly the same as the differences between an IRA and a Roth IRA. If your employer offers one, remember that the Roth 401K will give you much more flexibility around withdrawing money and will also allow you to withdraw tax free distributions at retirement. For the record don’t withdraw money until retirement! But it’s nice to have the option in case of emergencies. Obviously you also lose the tax deduction advantage up front, but most people finish their careers in a higher tax bracket than they started anyway. This is a particularly strong option for career minded people that are likely climb the corporate ladder getting raises all along the way, you’ll definitely finish in a higher tax bracket so this should be a no brainer for you.

  38. Don Panek says

    My company closed on dec 28, 2013
    I have a 401k worth about 160k.
    What should I do next.
    I’m 50 yr old.
    I will be getting future employment.

    • says

      @ Don If you’re asking if you should convert your 401k into Roth IRA, my initial thought is no. I think the taxes would be too much and since your company just closed, you should keep as much cash on hand as possible.

      I would definitely consider rolling your 401k into a traditional IRA, though.

  39. Laura says

    I am 36, and leaving my current employer with $55k vested dollars. My new employer will be contributing 5% of my salary once a year to their pension plan. My understanding is that I will be 100% vested from day one. My concern is that I will not be able to roll my 401K into my new company’s pension plan. If this is the case, should I roll my $55k into a Roth IRA?

    • says

      @ Laura It’s really hard to say without knowing your age, your tax bracket, investment strategy, etc. Use the Roth IRA Conversion calculator in this post and it should give you some guidance.

  40. Rusty says

    I am 66 years old and have a $500K IRA account balance. Want to roll it to Roth IRA and be able to make annual withdrawals of appox $50K for next 15 years. Is a Roth IRA right for me?

    • says

      @ Rusty

      Hard to say without knowing more on your situation (current tax rate, your projected tax rate, your investment strategy, goals with the money, etc). If this is purely for income for you to live off of, then most likely not. If this is more for legacy planning, then possibly.

  41. Sam Saks says

    I rolled over my Roth 401K into a Roth IRA in October 2013. I was then laid off from my company with a great severance which drastically pushed up my income for 2013 and consequently my taxes for 2013. I want to recharacterize my Roth contributions (initially made to the Roth 401K and then rolled over to the Roth IRA). Can someone help me with how to do that? Specifically I’m wondering what is the ‘date’ on which the contribution is considered to be made? Since it was through payroll contributions throughoutthe year into my Roth 401K and then rolled over.

  42. Maria says

    My current job will end soon. I have two retirement accounts with my current employer, one is a mandatory retirement plan (401K) and the other is a voluntary retirement plan (403b). Can I do a rollover IRA for both of them to the same new rollover IRA account?. Will this have any penalties or fees?. I have this doubt because I read at the IRS web page that “only one rollover is allowed every 365 days”.
    Thank you!

    • says

      @ Maria What you read refers to “IRA to IRA rollovers”. Since you are rolling over from a 401k and a 403b, this would not apply. Plus the new rule does not take place until Jan 2015.

  43. Harvey says

    I am 30 years old, just left my job and have about $40k in the 401k plan. While funding the 401k to the company match, I have also been fully funding my Roth IRA. Can I rollover the 401k plan to an IRA since I already fund it? If not, what other options do I have?

    • says

      @ Harvey If you rollover your 401k to the Roth IRA you are in essence doing a conversion. That means you’ll have to pay tax on the $40k that you rollover. (note: not all 401k plans allow you to do a direct rollover to a Roth IRA. You might have to open a traditional IRA first then convert to a Roth)

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