Rollover Your 401(k) Directly Into Roth IRA

In 2008 and 2009, you will be permitted to directly roll over/convert a 401(k) into a Roth IRA as long as you’re willing to pay the taxes for the conversion and if your annual income does not exceed $100,000 (in 2010, the $100k rule expires). In 401(k) official terms, this means that you can convert a distribution from an employer-sponsored plan directly into a Roth IRA. For those keeping score at home, this may come as a surprise since you couldn’t do this in the past and because you are basically throwing all the Roth IRA contribution limits out the window. Currently you can only contribute $5,000 a year to your Roth IRA, subject to income phaseout limitations, and so being able to convert from a 401(k) into a Roth is something that would circumvent that since the 401(k) limits are $15,500 a year!

What happens when you convert? Easy, the amount that you convert will be subject to your marginal income tax rate but then it’s tax-free at disbursement, since it is a Roth IRA at that point. Do you have to convert the whole thing? No, you pick how much you want to roll over, just as you would if it were to go into a Traditional/Rollover IRA, and you only pay taxes on that which converts into a Roth IRA. If you are willing to wait until 2010, you can convert as much as you want and spread out the tax liability over 2010 and 2011.

Now, before you jump at the opportunity to convert everything over to a Roth, I would investigate your tax diversification profile because having all your retirement assets in tax-free is just as bad as having all of your assets in tax-deferred accounts. Make sure you are properly diversified from this perspective so you don’t get sticker shock down the road.







8 responses to “Rollover Your 401(k) Directly Into Roth IRA”

  1. Keith

    I am under 50 years old and contributing the max to my company sponsored 401(k). I am planning on continuing to work at the same firm and funding my 401(k) for a number of years. However, I don’t like the fund choices in our plan. I would like to rollover my current funds into either a traditional or Roth IRA at my bank where I can have more fund choices and a better rate of return. Can I rollover some or all of my current 401(k) funds into an IRA even though I am not leaving the company and not retiring? I already have an existing Roth IRA. Can I rollover funds into this exising Roth IRA and pay the taxes on it?

  2. Pam

    Keith – I have the exact same question…any answers yet?

  3. retirehappy

    I’m pretty sure that unless you leave a company you cannot rollover a 401(k). As for rolling it over into a Roth and paying taxes, there are income limits (those limits are lifted in 2010) but if you earn over a certain amount you can’t do it.

  4. A big variable is future income tax rates. Those who believe
    tax rates will be higher,would be wise to take a long hard look at the benefits of the Roth. With medicare and SS so underfunded, I dont see how tax rates stay where they are.

  5. Keith & Pam,

    Generally speaking you can not perform a rollover unless:

    1. You reach age 59 1/2
    2. You leave the company or retire
    3. The division you work for is sold to another firm (and your status changes)

    When you turn age 59 1/2 you can usually withdraw your contributions. I would call the custodian of your 401K plans and find out which options are available to you.

  6. Chris

    I am 23 years old and I have been putting about 5% in my 401k over the past year or so. I have about 4 grand in the bank. I left my company and I am no longer making contributions. The money is just sitting there, gaining marginal interest. What is the best thing for me to do?

  7. Rich Men


    Roll your money over to a roth ira account….borrow against it for 60 day…and wipe your ass with it because you r screwed…..ha, ha, ha, ha

  8. I think it is a great idea to roll over your 401k to a roth IRA because of all of the benefits that you get with having a roth.