Must I be employed at the time I rollover 401K to Roth IRA?

Submitted by Marsha Lewitas on Thu, 2009-01-08 15:53

I will be retiring in 2 weeks (my husband is already retired and has a pension from the NYC Bd of Ed). If I choose to convert the 401K at my office to a Roth IRA, do I have time to do that? Must I withdraw all the funds or can I just deduct the taxes and leave the investments as is?
Also, my employer will make the 2008 match contribution to my 401K on or about October 2009. Must I hold the plan currently in the 401K or can I convert it and have them contribute to the Roth IRA??



Submitted by Alan Spross on Thu, 2009-01-08 18:48

I don’t know why you would not have time to process a conversion, but first your joint modified AGI for 2009 cannot exceed 100,000. If it does, you could wait until 2010 to convert. The match would also be in the account by then.

If the IRA custodian you are using does not provide a market for the particular investments in the 401k, they will have to be sold prior to the transfer. Let the IRA custodian review a statement showing all the plan holdings and they should be able to tell you which ones need to be sold.

See Q & A #6 in the attached for a description on how withholding is handled in such a rollover.

You might also consider the tax consequences of rolling over the entire plan balance to a Roth IRA. This could increase your marginal tax rate for 2009. Also, see if the custodian is willing to provide a second rollover when the match comes in if you transfer the current balance first.

If you have an after tax balance in the plan, the timing of your rollovers is critical. If you have these, please advise.

Submitted by Marsha Lewitas on Thu, 2009-01-08 19:35

I appreciate your response but I do not know how to see the Q & A #6 – do I go back to the main forum menu?

Further, I thought that I had heard that you need to be receiving an income (working) to open a Roth IRA – that is why I had to get to the bottom of it because I will only be employed for another 2 weeks and then I will be on Social Security. I don’t believe that Social Security is considered income??? My husband is receiving a pension, I believe that would be considered income.

Any information will be helpful to me because if timing is critical, i.e., rolling over BEFORE I retire, then I should proceed. If it doesn’t matter if I am working or not, then I can wait another year.

Thanks again for your response. Sincerely, Marshlew1

Submitted by Alan Spross on Thu, 2009-01-08 21:26

For a rollover contribution, you do not have to have earned income, so this can be done anytime you qualify. However, if your total modified AGI is over 100,000, a rollover to a Roth IRA must wait until 2010.

A regular Roth or traditional IRA contribution is different. For these, you must have earned income. Since you are only working for another two weeks, your earned income for 2009 will be limited. The other income you mentioned is not considered earned income.

Sorry, but I forgot to post the link to the IRS Notice that discusses withholding on Roth conversions from a 401k. Here it is. See Q 6:

http://www.irs.gov/pub/irs-drop/n-08-30.pdf

Submitted by Marsha Lewitas on Thu, 2009-01-08 22:35

I guess this clears things up for me and the information you forwarded is most helpful. Thanks again. Now I think I might be able to digest this and figure out what is best. I see that I have no need to rush into anything. I appreciate your help and wish you a good New Year.

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