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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.

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  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.)

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