401k direct conversion to Roth vs rollover to TIRA then conversion to Roth

Submitted by Tangy Ward on Mon, 2014-11-17 18:44

I’d like to understand/clarify the following:
1. Can you convert a 401k directly to a Roth?
If yes, would this eliminate your ability to recharacterize if desired?
If recharacterization is still possible, would a conversion done in December 2014 affect your ability to recharacterize in 2015?
In general does the time of year you convert play a role in maximizing your benefits?
2. Would you recommend rolling over to TIRA first and then doing Roth conversion?
What are the pros and cons of taking a multi-step approach?
3. How long does the process normally take to:
A. Convert 401k directly to Roth?
B. Rollover to TIRA and then do Roth conversion?
( I’m trying to determine my deadline for having this completed for the 2014 tax year)



Submitted by Alan - IRA critic on Tue, 2014-11-18 03:20

  1. A conversion directly from the 401k to the Roth IRA is permitted. The rollover can be recharacterized, but would not go back to the 401k, it would have to be transferred to a TIRA account. The recharacterization could be done as late as the extended due for 2014 (10/15/2015). Converting early in the year provides more time for gains, but it also provides more time for losses. Since the long term trend for the market is slowly upward, converting early has a slight advantage.
  2. If incremental conversions are desired to control the marginal rate for the conversions, it is easier to carry this out from a TIRA than from a qualified plan that could restrict distributions or require a full distribution after separation. However, basis in the plan from after tax contributions can be efficiently converted directly and the pro rate rules avoided. Once in the TIRA, pro rate rules can generally not be avoided.
  3. It may average around 10 days subject to considerable variation for plans, but the time to do a direct rollover to a TIRA or a Roth IRA is the same. Therefore, the additional time is the time it takes to convert once the funds were rolled to the TIRA. This can be done on line with many IRAs, so that portion may only take one day extra. It is still early enough to complete the process either way for 2014, but I would avoid starting the process after 12/15 since it may not get completed.

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