Can 401k Money Be Transferred to a Roth IRA?

If you're leaving a job and have a 401k plan, you may want to transfer it to a Roth IRA. There are a number of factors to consider, some of which can be very beneficial from a tax perspective.

Definition

Transferring money from one retirement account to another is called a rollover. You may transfer money from your 401k to a Roth IRA; however, there are rules and tax implications when you do.

Differences

A 401k plan is an employer-sponsored account. You contribute "pre-tax" dollars to save for your retirement. Your employer may also contribute money. These monies are taxed at the time of withdrawal. A Roth IRA is an account into which you make contributions on money that's already been taxed. The account then grows tax-free.

Adjusted Gross Income

In order to transfer money from your 401k to your Roth IRA, your modified adjusted gross income currently may not exceed $100,000. This threshold applies to both single and married filers. However, beginning in 2010, this limitation disappears.

Taxation

The amount that you transfer into your Roth IRA must be included as income in the year in which you transfer it. You will be responsible to pay income tax on the transferred amount. The tax rate will depend on your total income for the year.

Benefits

There are benefits to both types of retirement accounts. If your employer contributes to your 401k, it's essentially free money. On the other hand, Roth IRAs grow tax-free, have more flexible withdrawal limitations, and have no required minimum withdrawal distribution requirements.

References

• Rules You Must Know to Convert 401(k) to a Roth