How to Roll a 401(k) Into a Roth IRA

You must report your conversion with Form 1040 or Form 1040A.

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If you have money in a 401(k) plan and anticipate falling in a higher income tax bracket when you're going to take distributions, rolling the money into a Roth individual retirement account locks in your lower tax rate. Rolling the money into a Roth IRA not only gives you more control over your investment options, but it also allows you to take tax-free qualified distributions.

Conversion Eligibility

The Internal Revenue Service doesn't restrict who can convert from a 401(k) plan to a Roth IRA based on age or income, but you have to be able to access the money in your 401(k) plan. You can take 401(k) plan distributions only if you've left your job, the 401(k) plan terminated or you're 59 1/2 years old. In addition, hardship withdrawals and required minimum distributions are ineligible to be converted to a Roth IRA.

Conversion Methods

You can use either a rollover or a direct rollover to convert from a 401(k) plan to a Roth IRA. With a rollover, you take a distribution from the 401(k) plan and then deposit it in the Roth IRA within 60 days. With a transfer, your 401(k) plan administrator moves the money directly from the 401(k) plan to a Roth IRA. The advantage of using a direct rollover is you don't have to worry about income tax withholding or the 60-day time limit.

Tax Consequences

When you convert from a 401(k) plan to a Roth IRA, you'll have to pay income taxes on the conversion. Generally, the entire amount of the conversion counts as taxable income because after-tax contributions in a 401(k) plan are uncommon. Conversions are taxed as ordinary income, so the applicable tax rate is your marginal tax rate. As a result, it makes sense to convert in years that your other income is lower.

Tax Reporting

When you file your taxes, you have to report the conversion in the year you took the money from the 401(k) plan. First, report the entire distribution as a nontaxable pension and annuity distribution. Next, report the amount subject to income taxes as a taxable pension and annuity distribution and write "rollover" next to it. This indicates to the IRS that the money was rolled into a Roth IRA.

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About the Author

Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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