Indirect rollover from retirement plan to Roth?
I am in my mid 20’s and getting ready to set up a roth IRA for myself, and just had a quick question. I worked a year while in gradschool for a university and they put some pre-taxed dollars in the public employee retirement system. I would like to take this money and roll it over into a Roth IRA along with some of my savings. Now I know that I can’t directly roll it over into a roth, but would i be able to receive the money as a disbursement and then put it into a newly created roth without paying the 10% penalty? So for example, if i have $1000 in that account, I’d get a $800 check after taxes. I would still put $1000 + some of my savings into the roth (I would front the taxes). Would this work?
Permalink Submitted by Al Fry on Sun, 2007-10-14 22:09
You should be able to have it transferred (direct rollover) to an IRA, then convert it to your Roth.
Permalink Submitted by Andrew Rupert on Sun, 2007-10-14 23:00
So if I opened up a trad. IRA with some money from my savings, transfered the money from the retirement to the IRA, and then converted it to a roth this would be the best way?
Permalink Submitted by Al Fry on Mon, 2007-10-15 00:14
Correct, I think in 2008 one can go direct from a QRP to a Roth, but for now, one goes to a TIRA first.
Permalink Submitted by Alan Spross on Mon, 2007-10-15 00:20
You could open up a traditional IRA without making a regular contribution if you wish. The IRA would just receive the direct transfer from your other plan. That would avoid withholding on the plan distribution. Of course, if you had earned income and wanted to make a regular contribution to that account also, you could also do that. However, if you are eligible for a regular Roth contribution, you are better off to make that contribution directly to a Roth rather than first making it to a TIRA and then converting the TIRA. The reason is that conversions have a 5 year holding period before they can be distributed without penalty and regular Roth contributions do not.
You could also take a plan distribution check made out to you and roll it over within 60 days to an IRA if you wished. There is no early withdrawal penalty unless you fail to complete the rollover. As you noted, you would have to front the withheld 20% to complete the rollover before you converted to a Roth.