The tradeoff is that all earnings are tax-free. So when you retire and start making withdrawals, you will owe no taxes. No doubt, there are significant advantages to moving your k money to a Roth IRA. But, as noted earlier, it will be a taxable event. This bump in income could boost you to a much higher income bracket so that you are paying more tax than if you left the money in a traditional IRA and paid taxes as you made withdrawals in retirement.
Because the taxation of your money is changing, the switch from a traditional IRA to a Roth is called a conversion rather than a rollover. More importantly, it is a permanent process. So you should make sure this is what you really want to do before you do it. You can do this at virtually any major brokerage firm, mutual fund company or robo-advisor. You can do this online or over the phone. Your k plan administrator will then transfer your funds into your new IRA account.
Another path is an indirect rollover. In this case, the balance of the account is distributed directly to you, typically as a check. This risk is why most people choose the direct option. Another option is to take an indirect rollover. Funds withdrawn from your k must be rolled over to another retirement account within 60 days to avoid taxes and a substantial penalty. There are a few other options to consider if you are exploring ways in which to rollover your k :.
If you're taking a new job, there is no tax bite when you roll over your traditional k balance to another traditional k at a new job or, alternatively, roll over a Roth balance to another Roth balance. However, this is subject to the rules that govern your new company's plan. It might not be feasible if the assets in your old plan are invested in proprietary funds from a certain investment company and the new plan only offers funds from another company.
If your account contains your old employer's company stock , you might have to sell it before the transfer. A transfer also won't work if your old account is a Roth k and the new employer only offers a traditional k. If this is the case, you're looking at rolling your Roth into an IRA that you open on your own. The optimal deal would be to roll your old Roth k into a new Roth k.
The number of years the funds were in the old plan should count toward the five-year period for qualified distributions. However, the previous employer must contact the new employer concerning the amount of employee contributions that are being rolled over and confirm the first year they were made.
The account holder should transfer the entire account, not just a part of it. Cashing out your account, in whole or in part, is usually a mistake, whether it's a traditional or a Roth account. There is another key distinction between the two accounts. Fundamentally, the IRS does not want high-earners benefiting from these tax-advantaged accounts.
The income caps are adjusted annually to keep up with inflation. And that is why, if you have a high income, you have another reason to roll over your k to a Roth IRA. Roth income limitations do not apply to this type of conversion. Anyone with any income is allowed to fund a Roth IRA via a rollover—in fact, it is one of the only ways.
The b and b plans for public-sector and nonprofit employees may also be converted into Roth IRAs. Investors may choose to divide their investment dollars across traditional and Roth IRA accounts, as long as their income is below the Roth limits. However, the maximum allowable amount remains the same. Although they are perfectly legal, complicated tax rules apply to retirement account conversions, and the timing can be tricky.
So do not try it without obtaining financial advice first. A professional can help you decide, first of all, whether it's a good idea for you financially and, secondly, how to do it without incurring penalties. The ideal candidate for rolling an employer retirement fund into a new Roth IRA is a person who does not expect to take a distribution from the account for at least five years. This exemption allows the rolled-over k funds to be withdrawn without penalty. Internal Revenue Service.
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But in some cases, this less common move is also worth considering. There are a few reasons you might want to roll a traditional IRA into a k , though it should be noted you can do this only if your company plan accepts incoming transfers around two-thirds of plans do.
Here are the pro IRA-to k rollover highlights:. Potential for earlier access to that money: If you leave your job, you could start tapping your k as early as age The distribution amount is based on IRS calculation methods that take into account your IRA balance, age, life expectancy and, in some cases, interest rates.
It could mean taking more than you need, for longer than you want to.
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