Rollover 401k to Roth IRA

Can I rollover a 401 k into a Roth IRA?

401k to Roth IRA

The short answer to the question is YES.

Now the long answer! Yes, it is possible to rollover a 401k into a Roth IRA under a few conditions. Yes, same as any financial deal, there are conditions governing this process. The good news is that in 2008/09, you are allowed to rollover a 401(k) directly into a Roth IRA. That is under two conditions; first, you should be willing to pay the taxes for the conversion and second, your annual income should not exceed the limit of $100,000.  However, the $100,000 rule will only be effective from year 2010.

401k Roth IRA Rollover

Talking in 401(k) terms, you can convert (rollover) an employer sponsored distribution plan directly into Roth IRA. For many people, this comes as a total surprise and they have been not using the Roth IRA contribution limits effectively for years. With Roth IRA, people can only contribute $5,000 a year and it is also subjected to income limitations. Once the direct conversion becomes possible, it is a matter to celebrate as limits of 401(k) are $15,500 a year.

You’re probably asking yourself, “Why should I convert to a Roth IRA?” or, “what happens once the conversion is done?”.  The amount you convert is typically subjected to your income tax rate. This is the first condition we talked about at the beginning of this discussion. But when it is disbursed, there won’t be any tax applied as now it is a Roth IRA. How wonderful is that?

There is another question in your mind; do I have to rollover the whole 401(k) amount? No, you don’t have to. You can simply choose how much you want to rollover as it was to go into traditional IRA. In addition to that, you only have to pay taxes for the amount you convert from 401(k) to Roth IRA. Nothing else! In case if you have more time for this process and are willing to wait till 2010, you can convert any amount as you wish and spread the tax liability over 2010/11. Before you start the process of 401k to Roth IRA rollover, there are many things that you should consider. First of all, it is your tax diversification profile that matters the most. In addition to that, there are other parameters for this formula of converting a 401(k) into a Roth IRA. For someone to become eligible, there are other conditions that are considered such as the age of the person and his/her employment status at the point in which the rollover takes place.

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