Published Tuesday, November 2, 2010 at: 7:00 AM EDT
In the not-so-distant past, it wasn’t particularly easy to roll over funds from a 401(k) plan to a Roth IRA, which can provide tax-free income during retirement or for your heirs. Now, it’s a relative snap. What’s more, the IRS recently provided guidance on how to complete this maneuver.
Prior to the Pension Protection Act of 2006 (PPA), it took two steps to complete a 401(k) to Roth rollover, and it was possible only if your income didn’t exceed a specified limit. First, you transferred funds from your 401(k) to a traditional IRA. Next, you converted the traditional IRA to a Roth, paying income taxes on the amount of the conversion. But you could do this only in a year in which your modified adjusted gross income (MAGI) didn’t exceed $100,000.
The PPA fixed part of the problem. Beginning in 2007, you were allowed to roll over funds directly from a 401(k) plan to a Roth, bypassing the traditional IRA. But you still might have been blocked by the $100,000 limit.
That impediment no longer exists. Based on a tax law change that took effect in 2010, you may now convert to a Roth regardless of your annual MAGI. (For conversions that were completed in 2010, you were able to split taxable conversion income between 2011 and 2012. That allowed you to postpone the tax hit of converting to a Roth, and may have saved tax overall.)
The IRS recently issued rulings clarifying aspects of a direct rollover. The guidance included these points:
This is just an overview. We can work with you to weigh the merits of a Roth conversion and help you follow the rules governing such transfers.
This article was written by a professional financial journalist for Preferred NY Financial Group,LLC and is not intended as legal or investment advice.
An individual retirement account (IRA) allows individuals to direct pretax incom, up to specific annual limits, toward retirements that can grow tax-deferred (no capital gains or dividend income is taxed). Individual taxpayers are allowed to contribute 100% of compensation up to a specified maximum dollar amount to their Tranditional IRA. Contributions to the Tranditional IRA may be tax-deductible depending on the taxpayer's income, tax-filling status and other factors. Taxed must be paid upon withdrawal of any deducted contributions plus earnings and on the earnings from your non-deducted contributions. Prior to age 59%, distributions may be taken for certain reasons without incurring a 10 percent penalty on earnings. None of the information in this document should be considered tax or legal advice. Please consult with your legal or tax advisor for more information concerning your individual situation.
Contributions to a Roth IRA are not tax deductible and these is no mandatory distribution age. All earnings and principal are tax free if rules and regulations are followed. Eligibility for a Roth account depends on income. Principal contributions can be withdrawn any time without penalty (subject to some minimal conditions).
© 2024 Advisor Products Inc. All Rights Reserved.
Not found any published videos!
Jericho Atrium, 500 N Broadway # 219
Jericho, NY 11753
Phone: +1 516-935-3434
Fax: 516-935-3454
Securities provided through American Portfolios Financial Services, Inc. Member: FINRA, SIPC. Advisory services offered through American Portfolios Advisors, an SEC Registered Investment Advisor. Preferred NY Financial Group LLC is not affiliated with American Portfolios Financial Services, Inc. & not affiliated with American Portfolios Advisors
When you link to any of these websites provided here, you are leaving this site. We make no representation as to the completeness or accuracy of information provided at these sites. Nor are we liable for any direct or indirect technical or system issues or consequences arising out of your access to or use of these third-party sites. When you access one of these sites, you are leaving our website and assume total responsibility for your use of the sites you are visiting.
Calculators are provided only as general self-help planning tools. Results depend on many factors, including the assumptions you provide and may vary with each use and over time. We do not guarantee their accuracy, or applicability to your circumstances.