401k Roth conversion
I have a client that would like to do a Roth conversion. She is retired and has her assets in a 401k. Her AGI is less than 100k MFJ for ’09. Can she do a rollover to an IRA and then do the conversion? She said she read an article in the WSJ that said she needed to wait 1 year after the rollover to do the conversion. She also has an existing Roth that she has had for over 5 years. Can she roll the 401k to her Roth and pay the taxes on the conversion?
Permalink Submitted by Alan Spross on Fri, 2009-09-25 20:02
There is no waiting period for the conversion after the direct rollover to a TIRA. Perhaps the article was about 2010 conversions to take advantage of the two year tax deferral.
She could also do a direct conversion from the 401k to the Roth IRA, or to a new Roth IRA. A new Roth would be better in the event she either has to recharacterize the conversion (income goes over 100,000) or she wants to recharacterize all or part of it because of losses in the Roth or just does not want to pay taxes on the full conversion. Any recharacterization would have to go to a TIRA account, it cannot go back to the 401k. She could eventually combine the Roths after the recharacterization deadline passes. If the conversion will be too large, if the plan offers two direct rollovers she could convert part of the balance and transfer the rest to a TIRA and convert in a later year from the TIRA.
She should not convert so much in a single year that her tax bracket will be increased. Often a 401k can be quite large, and should therefore be converted over several years.