Do I Have to Pay Taxes If I Rollover My 401(k) to a Roth IRA?

A 401(k) is an employer-sponsored retirement fund, typically with contributions from both an employee and an employer. Traditional 401(k)s are "deferred compensation" plans in which an employer defers pay and contributes the deferred amount to the 401(k). The amounts deferred are reported on a W-2 wage statement but do not count as taxable income until they are withdrawn. A Roth IRA is a personal account, funded with money contributed after taxes, so no taxes are owed on withdrawal.

Taxes Due

You can roll a 401(k) into a Roth IRA, but you'll owe tax on the untaxed money you take out of the 401 to put into the Roth. You won't have to pay a 10 percent penalty for early withdrawal if you roll it over, but the rollover will count as taxable income at the time of the transfer. You can only do a rollover if you leave the employer or are age 59 1/2.

Roth to Roth

Internal Revenue Service rules allow you to designate some or all of your 401(k) contributions as "Roth elective deferrals." This means those funds will be taxed as ordinary income at the time the contributions are made. If you have designated all your contributions to a 401(k) as a Roth, those funds can be rolled into a Roth IRA without penalty or income tax. A Roth 401(k) can only be rolled into a Roth IRA.

Blended Funds

If your 401(k) has "blended" funds, a mixture of Roth and non-Roth contributions, you can't avoid taxes by just moving the Roth portion. The IRS will treat every dollar as a blended dollar and tax the appropriate portion. If 20 percent of your 401 is non-deductible money, that is, funds you paid tax on when they were contributed, the IRS will assess taxes on 80 percent of every dollar you convert.

Direct Transfers

Converting your 401(k) to a Roth IRA is best done by direct transfer. If you close out your 401(k), your employer is required to withhold 20 percent against possible taxes. You then have 60 days to put it into a Roth IRA or have the entire amount counted as a taxable withdrawal. With a direct transfer, your employer will move the money for you, but you will still owe taxes on any untaxed portion.

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About the Author

Bob Haring has been a news writer and editor for more than 50 years, mostly with the Associated Press and then as executive editor of the Tulsa, Okla. "World." Since retiring he has written freelance stories and a weekly computer security column. Haring holds a Bachelor of Journalism from the University of Missouri.

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