401k to Roth IRA Guidelines
If you have a 401k balance, it might be wise to convert it into a Roth IRA. Roth IRAs give you more flexibility in your investment choices, they offer tax-free growth, tax-free income in retirement and there are no required minimum distribution rules that force you to take your money out on the IRS' schedule, not yours. But there are rules to keep in mind.
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Rollover Rules in General
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When you conduct a rollover from a 401k to an IRA, you must complete the transaction and have the funds in the IRA account within 60 days of receiving the 401k proceeds or you'll pay taxes on the transaction. The IRS may also levy a 10 percent penalty on early withdrawals -- even on the 20 percent that the 401k company will withhold to pay taxes. To avoid triggering this rule, have the 401k custodian transfer the money directly into the IRA in what is known as a trustee-to-trustee transfer; you never touch the money yourself.
Considerations
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You can roll 401k money into IRA or Roth IRA accounts. You can roll your 401k balance into a Roth IRA account if you believe tax rates will be higher during your retirement, if you are concerned about paying required minimum distributions or if you want to pass your IRA on to heirs. Keep in mind that when you conduct a 401k-to-Roth IRA rollover you will have to pay income taxes on the full amount transferred.
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Eligibility
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Beginning in 2010, there are no longer any income restrictions on rollover eligibility. You can rollover or convert any amount to a Roth IRA, regardless of your adjusted gross income.
Taxation
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For 2010 rollovers only, the IRS is offering taxpayers the option of spreading the taxes due on a conversion to a Roth IRA over tax years 2010, 2011 and 2012.
Restrictions
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You cannot roll required minimum distributions from an employer plan such as a 401k into an IRA. You also cannot roll over hardship distributions or any part of substantially equal periodic payments over your lifetime or a period of 10 years or more.
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