Leaving job - 401k to Roth IRA?

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jcf
Posts: 24
Joined: Sun Apr 19, 2015 3:03 am

Leaving job - 401k to Roth IRA?

Post by jcf » Fri Jan 12, 2018 12:05 pm

I am planning to leave my job and start a business. I am trying to max out my 401k for the year before I leave. I will keep the 401K as it is with my employer as I am happy with their structure. I don't expect to make much money in the startup this year (being realistic). I never qualified for Roth IRA before because of being above the income limit. But, may be now I do?
My questions:
1. Can I open a Roth IRA account as soon as I leave my job ad put in the yearly contribution amount? Does the income limit rule apply to the latest day situation or is it based on past year's earnings? When do I become eligible after leaving my job (and having no income)?
2. Can you contribute to 401K and Roth IRA in the same year for a situation like this? (401k when employed, and Roth when not employed)
Anything else I need to watch out for? Any suggestions or tips would be welcome for my situation.

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flamesabers
Posts: 1648
Joined: Fri Mar 03, 2017 12:05 pm
Location: Rochester, MN

Re: Leaving job - 401k to Roth IRA?

Post by flamesabers » Fri Jan 12, 2018 12:12 pm

jcf wrote:
Fri Jan 12, 2018 12:05 pm
1. Can I open a Roth IRA account as soon as I leave my job ad put in the yearly contribution amount? Does the income limit rule apply to the latest day situation or is it based on past year's earnings? When do I become eligible after leaving my job (and having no income)?
The income limit for Roth IRAs doesn't apply to rollovers. If your income for the year is above the eligibility limit you can't contribute directly to a Roth IRA. Instead, you should consider doing a backdoor Roth IRA.
jcf wrote:
Fri Jan 12, 2018 12:05 pm
2. Can you contribute to 401K and Roth IRA in the same year for a situation like this? (401k when employed, and Roth when not employed)Anything else I need to watch out for? Any suggestions or tips would be welcome for my situation.
Assuming you meet the eligibility requirements, you can contribute to a 401k and a IRA in the same calendar year. You must have earned income to be eligible to contribute to a 401k and/or IRA for the calendar year. This rule doesn't apply to rollovers or converting traditional balances to Roth.

CppCoder
Posts: 637
Joined: Sat Jan 23, 2016 9:16 pm

Re: Leaving job - 401k to Roth IRA?

Post by CppCoder » Fri Jan 12, 2018 12:13 pm

jcf wrote:
Fri Jan 12, 2018 12:05 pm
I am planning to leave my job and start a business. I am trying to max out my 401k for the year before I leave. I will keep the 401K as it is with my employer as I am happy with their structure. I don't expect to make much money in the startup this year (being realistic). I never qualified for Roth IRA before because of being above the income limit. But, may be now I do?
My questions:
1. Can I open a Roth IRA account as soon as I leave my job ad put in the yearly contribution amount? Does the income limit rule apply to the latest day situation or is it based on past year's earnings? When do I become eligible after leaving my job (and having no income)?
2. Can you contribute to 401K and Roth IRA in the same year for a situation like this? (401k when employed, and Roth when not employed)
Anything else I need to watch out for? Any suggestions or tips would be welcome for my situation.
You can open a Roth IRA today. It's funding that is limited by income. The amount you can contribute in 2018 is based on the amount you earn in 2018. You can contribute to a 401k and Roth IRA regardless of your employment situation if you are under the income restriction.

jcf
Posts: 24
Joined: Sun Apr 19, 2015 3:03 am

Re: Leaving job - 401k to Roth IRA?

Post by jcf » Fri Jan 12, 2018 2:05 pm

Thanks for responses so far. But, I didn't the answer I was looking for. I am aware of the rollover options, but not looking for that. Or may be I wasn't clear. So, let me try this again.
My income in 2017 was above the limit to fund a Roth IRA. But, since I will leave my job next month and not earn anything for rest of the year, my income for 2018 (2 months income) would be under the Roth income limit for 2018.

While employed in Jan/Feb, I will maximize my 401k contribution ($18500).
Assuming that only 2018 income is counted (and not 2017), can I open a Roth IRA in March and fund it with $5500 (max contribution)?
Any issues here?

e5116
Posts: 306
Joined: Mon Oct 05, 2009 11:22 am

Re: Leaving job - 401k to Roth IRA?

Post by e5116 » Fri Jan 12, 2018 2:15 pm

jcf wrote:
Fri Jan 12, 2018 2:05 pm
Thanks for responses so far. But, I didn't the answer I was looking for. I am aware of the rollover options, but not looking for that. Or may be I wasn't clear. So, let me try this again.
My income in 2017 was above the limit to fund a Roth IRA. But, since I will leave my job next month and not earn anything for rest of the year, my income for 2018 (2 months income) would be under the Roth income limit for 2018.

While employed in Jan/Feb, I will maximize my 401k contribution ($18500).
Assuming that only 2018 income is counted (and not 2017), can I open a Roth IRA in March and fund it with $5500 (max contribution)?
Any issues here?
Yes, assuming you made at least $5500 in Jan and Feb, you can contribute the max contribution directly to the Roth IRA in March. However, this must be indicated for tax year 2018 and not 2017 since you were above the limit to fund a Roth IRA in 2017. If you wanted to make another $5500 contribution against the 2017 tax year, you'd have to use the backdoor method for those dollars.

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flamesabers
Posts: 1648
Joined: Fri Mar 03, 2017 12:05 pm
Location: Rochester, MN

Re: Leaving job - 401k to Roth IRA?

Post by flamesabers » Fri Jan 12, 2018 2:22 pm

jcf wrote:
Fri Jan 12, 2018 2:05 pm
While employed in Jan/Feb, I will maximize my 401k contribution ($18500).
Assuming that only 2018 income is counted (and not 2017), can I open a Roth IRA in March and fund it with $5500 (max contribution)?
Any issues here?
If you have $5.5k (or more) of taxable compensation for 2018 you can fully fund your Roth IRA since you'll be under the maximum income cut-off.

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