Can I roll my 401k to a Roth IRA?

How to rollover your 401k to a Roth IRA. IRA requirements on income level for rollovers. Types of IRA rollovers: Direct Rollover or Indirect Rollover.

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Can I Roll My 401(k) to a Roth IRA: The commonly asked question

Powerpoint slides on a superior retirement planning strategy called Roth IRA on Roids which allows for tax-free distributions, tax-free growth, guaranteed principal and guarateed death benefits.In many cases, an employer will offer a retirement savings plan such as a 401(k). If you ever leave that job, you will have to make a decision regarding your 401(k). You can cash it out and take what is in the account, minus taxes, but this is not advised. So this leaves the question, can I roll my 401(k) to a Roth IRA? The answer is yes, and for most individuals, it is probably the best thing to do. If you decide to do the rollover, you must have a Roth IRA account. If you do not currently have one, you will need to open a new account before performing the rollover.

Types of Rollovers: Direct Rollover / Indirect Rollover

When dealing with a 401(k) plan, there are two types of rollovers to choose from. The first is a direct rollover. This is usually the best option. With a direct rollover, the funds from your 401(k) will simply be sent over to the Roth IRA account. The only requirement is that you already have an open Roth IRA account. With this type of rollover, you should not incur any IRA penalties or withholding taxes when performing the rollover. It is a simple matter of transferring the funds from one account to the other.

The other type of rollover is indirect. This can be more complicated. You may have been trying to find the answer to whether you can roll your 401(k) over to a Roth IRA. Now that you have determined that is possible, you may have wasted some valuable time. An indirect rollover occurs when there were distributions made from the 401(k). Simply put, you would have received a check for the amount from your 401(k) account. If you do receive a check, you will notice that the amount will be less 20% for taxes. This is where things can get complicated. In order to abide by IRA rules, the rollover must consist of the entire amount that was in your 401(k). For example, if you had $100,000 in the account, you would have gotten a check for $80,000. Now, when you go to perform the rollover, you must find a way to come up with that 20%! That means it is your responsibility to find $20,000 to make up the difference. There is no need to panic too much because as long as you follow the rules, you will get the 20% back when you file your income taxes at the end of the year.

In addition to the 20% issue, you also have a time frame in which you must make the rollover complete. From the date the funds are distributed from the 401(k), you will have 60 days to complete the rollover. If you do not already have a Roth IRA account open, you will need to open a new account and make up that 20% that was lost to taxes. The rollover must be completed within 60 days.

Requirements for a Roll over from 401k to Roth IRA

Now that you have determined that you can roll your 401(k) to a Roth IRA, you must make sure that you will meet the eligibility guidelines for the Roth IRA. Of course, if you already have a Roth IRA, you do not need to worry about this. However, if you have to open a new Roth IRA, you must be aware of the Roth IRA rules. The most important factor is your income. Currently, in order to be eligible for a Roth IRA, your adjusted gross income cannot exceed $120,000 per year. If you exceed this amount, you will not be able to open a Roth IRA account.

If you do lose your job and have to rollover your 401(k), an IRA retirement account is your best option. A direct rollover is preferred, but it is not always possible. The process of rolling over your 401(k) to a Roth IRA is not complicated as long as you abide by IRA rules.

Rocco Beatrice, CPA, MST (Master of Science in Taxation), MBA (Master of Business Administration), BSBA (Management/Accounting), CWPP (Certified Wealth Preservation Planner), CMMB (Certified Mortgage Broker), CAPP (Certified Asset Protection Planner), Managing Director, Estate Street Partners, LLC. Mr. Beatrice is an asset protection, award-winning trust, estate planning and tax expert.

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