Converting a 401k to a ROTH IRA

A question I often receive from individual contemplating rolling money out of their 401k is "can I roll directly into a ROTH IRA?" The answer is "YES" and if you have already begun a rollover into a traditional IRA you can change your mind and roll over your balance to a ROTH IRA instead per the IRS’s Spring issue of its “Retirement News for Employers."

Background. Rollovers from a regular IRA to a Roth IRA have been permitted for a long time, as have rollovers from qualified plans (including 401(k) plans) to regular IRAs. However, rollovers from qualified plans to Roth IRAs have only been permitted for post-2007 distributions. Rollovers to a Roth IRA (whether from a regular IRA or a qualified plan) are permitted only if the taxpayer’s modified adjusted gross income (AGI) doesn’t exceed $100,000, and he isn’t a married individual filing a separate return. However, in 2010 the $100,000 modified AGI limit on rollovers to Roth IRAs is eliminated and the best part is (2) married taxpayers filing a separate return may make rollovers to Roth IRAs. However, under Code Sec. 408A(d)(3)(A), a complex income inclusion rule applies that unless you elect otherwise, none of the income from the conversion will be included in income in 2010. Rather, half of the income resulting from the conversion will be includible in gross income in 2011 and the other half in 2012.

Posted by Clint Coons, asset protection attorney, Seattle, WA

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