“Can I Roll My 401k Into a Roth IRA?”
It’s a question we are oft asked here at Invest-Your-Money-Now.com…“Can I Roll My 401k Into a Roth IRA?”
The short answer is, that yes, you can. But there are a few things you should know about this before you consider doing it.
1. Be sure you are able to move your 401k.
There are pretty strict rules with regard to moving your 401k. Sometimes you literally can’t move your 401k at all without incurring a penalty.
The main two situations which allow somebody to rollover their 401k assets without getting penalized are
- Separation from employer. You have either quit, been fired, retired, found a new job, etc. You no longer work for the company who sponsored your 401k.
- Having reached the retirement age. You are 59 and-a-half or older.
If neither of those situations apply to you, you may not be able to roll your 401k into a Roth IRA. In fact, you may not be able to distribute the assets in your 401k at all.
To be sure, check with the plan administrator at the company who sponsors your 401k.
If you are able do a rollover, you CAN roll your 401k into a Roth IRA, but you should know that if you do…
2. There will be some major taxes.
Almost all 401k contributions are made with pre-tax dollars. That means that Uncle Sam hasn’t received his cut yet.
When you reach the retirement age, and you begin making distributions from your 401k, Uncle Sam plans on taking a cut.
In a Roth IRA, all the contributions are made with after-tax dollars. That means that Uncle Sam has already been satisfied.
When you reach the retirement age, and you begin making distributions from your Roth IRA, Uncle Sam doesn’t get a dime.
(Not unless Obama changes the Roth IRA rules!)
So to make a long story short, you will be subject to taxes on any amount of money that you rollover from a 401k into a Roth IRA.
If you have say, $100,000 in your 401k which you transfer to a Roth, you will take a tax hit equivalent to your income tax bracket.
Most people are around 30%. So that means a $30,000 hit. Not the ideal situation.
If you have $50,000, you’ll take a $15,000 hit.
If you have $20,000, you’ll take a $6,000 hit.
If you have $10,000, you’ll take a $3,000 hit, etc.
But there is another option…
3. You can spread the tax obligations over time
You can roll your 401k into a Traditional IRA without creating any tax liability. Once it’s in a regular IRA, you can begin converting it into a Roth IRA little-by-little.
It’s a difference of whether you feel like paying all the taxes now, or pay them later.
So here’s how it would play out if you chose to spread the tax obligations over time…
The first year, you would roll your entire 401k into a REGULAR (not a Roth) IRA. Let’s say it was $50,000. You would now have $50,000 in an IRA, no tax obligations.
Then, you open up a Roth IRA and decide to roll say, $5,000 into it. You now have $45,000 in your regular IRA, $5,000 in your Roth, and a tax liability on the $5,000 that you rolled into it.
Does that make sense? Hopefully we have answered your burning question; can I roll my 401k into a roth ira? Now you know.
I was trying to be as clear as possible, but I know it can be a bit tricky sometimes. Feel free to contact us for more details. We will try to respond as quickly as possible.