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Is a Rollover from a Traditional 401(k) to Roth IRA Possible?

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In a past post, we talked about what do with an orphaned 401(k). With job changes more frequent now compared to 50 years ago, determining what to do with 401(k) funds is a fact of life for the modern worker.

However, even though the possibility has existed for over 20 years, many employer plans still don’t have Roth contribution capability. Does this mean that those wanting to make after-tax contributions are out of luck?

Is a rollover from a 401(k) to a Roth IRA possible when the former isn’t a Roth 401(k)?

Yes, it is possible, under certain circumstances.

The most obvious circumstance is you must be entitled to take a distribution from the 401(k) plan. Of course, if this is a dormant plan and you no longer work for that employer, then you should be able to access the account. But you may also be able to access the funds even while you’re working. If you wonder if this applies to your plan, check with your 401(k) administrator to see what’s allowable.

The next circumstance presumes the entire plan consists of pre-tax funds. If so, you can generally convert the taxable portion of the distribution. Because the distribution amount would be pre-tax funds moving into a post-tax account, you must include the taxable portion of the amount in your gross income for the year of the rollover.

But if your distribution includes both after-tax and pre-tax amounts, you can generally roll over the after-tax dollars to a Roth IRA. If you choose this route, the conversion would be tax-free. You can then make a tax-deferred rollover to a Traditional IRA for the remaining amount.

And keep in mind you can’t roll over certain items, including some periodic payments and required minimum distributions.

With that said, you may have a reason not to roll to a Roth IRA. Always compare any accompanying administration fees with both types of accounts. Also, understand any rights or guarantees you may give up by transferring out of the employer plan. Also consider any benefits of just rolling over to a new employer plan, if applicable. Finally, you may instead take a cash withdrawal and deal with the resulting taxes.

Whatever fits your investing and retirement needs, know that you have options. But if you do choose to roll over to an IRA of any kind, know that Kingdom Trust is here to help! Contact us today with any questions you may have about the process.

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