This is because, whenever you leave your job, you have a decision to make with regards to your 401k plan. Typically many people elect to rollover their 401k to a traditional IRA (Individual Retirement Arrangement). However, it’s also possible to consider a rollover to a Roth IRA. Keep reading for our guide to how you can roll your 401k to a Roth IRA.
What is a Roth IRA?
A Roth IRA is a special type of retirement plan under US law that is generally not taxed, provided certain conditions are met. This type of scheme was established by the Taxpayer Relief Act of 1997 and named after its chief legislative sponsor, Senator William Roth of Delaware.
In contrast to a traditional IRA, contributions to a Roth IRA are not tax-deductible. Withdrawals are generally but not always tax-free and there are certain stipulations. For example, you have to be aged at least 59 1/2 for tax free withdrawals on the growth portion above principal.
An advantage of the Roth IRA over a traditional IRA is that there are fewer withdrawal restrictions and requirements. Transactions inside an account (including dividends, capital gains and interest) do not incur a current tax liability.
Can I roll my 401k to a Roth IRA?
The simple answer to this question is ‘generally, yes’.
However, remember that you must be separated from your employer to roll your 401k into a Roth IRA. You cannot do this if you are still working for the same company and/or employer unless you are aged over 59 ½.
The process for rolling your 401k into a Roth IRA was simplified in 2008. Prior to this, you were simply not able to directly rollover your 401k into a Roth IRA. If you wanted to do so you had to complete a two-step process. You had to open a traditional IRA and then convert the traditional IRA into a Roth IRA which as a long-winded and complicated process.
However, just because the law changes made it available to rollover your 401k plan into a Roth IRA doesn’t mean that you can always do it. Whether you can rollover depends on your plan administrator. And, keep in mind that you have to have a Roth IRA already established.
To this day, many 401k’s and 403b’s have had the same ‘No-Roth IRA Rollover’ option. This option is supposed to be mandatory in 2010, but some plans still do it on a voluntary basis.
So, starting in 2010, anybody was able to take all their traditional IRA’s and old retirement plans (401ks) and convert them to a Roth IRA. The amount that you convert will be taxed, but it still can be an attractive move for you if you that feel that taxes are going nowhere but up.