New Here? Get the Free Newsletter

Oblivious Investor offers a free newsletter providing tips on low-maintenance investing, tax planning, and retirement planning. Join over 17,000 email subscribers:

Articles are published Monday and Friday. You can unsubscribe at any time.

401k to Roth IRA Rollover

Note: This article is about rolling a 401(k) account into a Roth IRA. For information about rolling your 401(k) into a traditional IRA, see this article.

Previously (prior to 2008) to rollover your 401(k) into a Roth IRA you had to use the following process:

  1. Open a traditional IRA
  2. Rollover your 401(k) to the traditional IRA
  3. Open a Roth IRA
  4. Convert the amount in the traditional IRA to the Roth IRA.

Now, however, the process has been simplified. After you’ve left your job, you can directly roll your 401(k), 403(b), or 457 account into a Roth IRA.

The Rollover Process

Step 1: Open a Roth IRA (if you don’t have one open already).

Step 2: Request rollover paperwork from your 401(k) administrator. Fill it out, indicating that you want to roll your account into your Roth IRA. (If your plan administrator does not provide this option, you’ll have to follow the old process of rolling it into a traditional IRA, then converting it to a Roth.)

Step 3: Include the amount of the rollover in your gross income on Form 1040 (lines 16a and 16b) for the year in which the rollover occurred. (Note: If your rollover occurs in 2010, you have the option of deferring the tax on the rollover–paying half of it in 2011, and half of it in 2012.)

Am I Eligible to Roll My 401(k) into a Roth IRA?

For tax years prior to 2010, you could only roll your 401(k) into a Roth IRA if your Adjusted Gross Income was below a certain limit ($100,000 for 2009). Beginning in 2010, however, the income limit disappears.

Should I Rollover My 401(k) to a Roth IRA?

After you leave your job, rolling your 401(k) into an IRA is almost always a good idea. Whether you should roll it into a Roth IRA is more debatable. The decision is basically the same as deciding whether you should convert your traditional IRA to a Roth IRA. Specifically, if you:

  • Expect to be in a lower tax bracket in retirement than you’re in now, or
  • You don’t have the cash on hand to pay the tax on the amount of the rollover,

…then it’s probably better to roll it into a traditional IRA rather than a Roth IRA.

New to Investing? See My Related Book:

Book6FrontCoverTiltedBlue

Investing Made Simple: Investing in Index Funds Explained in 100 Pages or Less

Topics Covered in the Book:
  • Asset Allocation: Why it's so important, and how to determine your own,
  • How to to pick winning mutual funds,
  • Roth IRA vs. traditional IRA vs. 401(k),
  • Click here to see the full list.

A Testimonial:

"A wonderful book that tells its readers, with simple logical explanations, our Boglehead Philosophy for successful investing." - Taylor Larimore, author of The Bogleheads' Guide to Investing

Comments

  1. Hi Regular Lurker.

    I’d be happy to write a post about that for next week. (It’s a broad enough topic that I’d prefer to cover it with a post rather than simply write thoughts off the top of my head.)

Disclaimer: By using this site, you explicitly agree to its Terms of Use and agree not to hold Simple Subjects, LLC or any of its members liable in any way for damages arising from decisions you make based on the information made available on this site. I am not a financial or investment advisor, and the information on this site is for informational and entertainment purposes only and does not constitute financial advice.

Copyright 2017 Simple Subjects, LLC - All rights reserved. To be clear: This means that, aside from small quotations, the material on this site may not be republished elsewhere without my express permission. Terms of Use and Privacy Policy