Rollover from traditional 401K to Roth IRA?

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Rollover from traditional 401K to Roth IRA?

Post by AQ » Mon Jun 19, 2017 12:44 am

I just came across it that one could simply roll over a traditional 401K to individual Roth IRA accounts, by paying taxes due on the 401K balance... Is this true? I'm not asking if what it is a best choice, but if this is even a feasible route? If true, it sounds like a straightforward 'backdoor' Roth IRA? Many don't have Roth 401K available, and even if they do, employer matches are often pre-taxed..

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Re: Rollover from traditional 401K to Roth IRA?

Post by retiredjg » Mon Jun 19, 2017 9:17 am

A traditional 401k can be rolled directly to Roth IRA edited to add: once you have left the employer or are over 59.5 if your plan allows it. Taxes will be due and should be paid out of savings, not out of the 401k to avoid a 10% early withdrawal penalty on the amount taken to pay the tax.

No, this is not a "straightforward "backdoor" Roth IRA. That is something different.

Employer matches are always pre-tax to my knowledge.

Unless the 401k is very small, this is probably not a good idea in most situations. You may even end up paying more tax than you would have if you had not deferred the tax in the first place.
Last edited by retiredjg on Mon Jun 19, 2017 10:18 am, edited 1 time in total.

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Re: Rollover from traditional 401K to Roth IRA?

Post by rkhusky » Mon Jun 19, 2017 9:38 am

Many (most?) 401K plans do not allow you to roll over your 401K to an IRA while you are still working for the company. But if you are retiring or moving to a different company, it should be fairly straightforward.

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Re: Rollover from traditional 401K to Roth IRA?

Post by flamesabers » Mon Jun 19, 2017 9:39 am

I think the ideal time to do something like this is when you're going to be in a low tax bracket for the year. Otherwise I would suggest either leaving the account as it is or rolling it over to another 401k that has a better plan.

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Re: Rollover from traditional 401K to Roth IRA?

Post by Spirit Rider » Mon Jun 19, 2017 9:47 am

You can certainly rollover a traditional 401k to a Roth IRA if you no longer work for the employer sponsoring the plan. As pointed out by rhusky, it is more problematic at your current employer's plan.

First, IRS regulations prohibit the rollover of employee deferrals prior to age 59 1/2. IRS regulations do allow vested employer contributions and other limited assets to be rolled over from your current employer's 401k plan prior to age 59 1/2, but only if the plan adopts rules allowing it. Many 401k plans do not allow this.

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Re: Rollover from traditional 401K to Roth IRA?

Post by Earl Lemongrab » Mon Jun 19, 2017 11:13 am

Plans can add other restrictions in some cases. Megacorp allows you to distribute company matching, but if you do they suspend matching for six months.
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Re: Rollover from traditional 401K to Roth IRA?

Post by Alan S. » Mon Jun 19, 2017 11:43 am

Note that if you do roll pre tax 401k money to your Roth IRA, it can later be recharacterized from the Roth IRA to a TIRA if you determine that the rollover was a mistake. You could also do a partial recharacterization if you wanted to limit the taxable amount of the rollover.

This "do over" is the same as for a TIRA to Roth IRA conversion, but is something that you CANNOT do if you were to roll pre tax 401k money to a Roth 401k (in plan Roth rollover or IRR). Since IRRs were adopted recently some plans may allow you to roll pre tax 401k money, even your elective deferral money, into the Roth 401k account, but NOT allow you to roll the funds out of the 401k to your Roth IRA. If you do an IRR, the tax impact is the same as doing the rollover to your Roth IRA, but it CANNOT be reversed so you need to be very careful if you do an IRR.

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