Rolling over 401K and converting at same time
a client age 59 is retiring and wants to establish a new roth account while they still have earned income. They want to contribute for 2009, 2010 and directly roll $58,000 from a 401k plan into this new Roth. The accepting custodian says it is no problem, that they will accept the 401k assets as a Roth . Is it really as easy as doing a direct rollover to convert 401k assets to a Roth? Do I need to know something else? It is not necessary to go thru a traditional IRA account first, then convert to Roth?
Thank you.
Kathy
Permalink Submitted by Alan Spross on Fri, 2010-04-02 18:22
A direct Roth conversion from a 401k has been available since 2008. There is no reason the client cannot do as planned.
The only other consideration would be to set up a separate Roth IRA for the conversion, as it would simplify the recharacterization process if the client changes their mind. Any recharacterization would have to be made to a TIRA account as the funds cannot go back to the 401k plan. And, the client can report the conversion income equally in 2011 and 2012 just as if they were converting a TIRA instead of a qualified plan.
If there are any after tax contributions included in the 58k, those amounts would not be taxable. As soon as client hits 59.5 they could withdraw their conversion tax and penalty free as the 5 year holding period would no longer apply. However, withdrawing any part of the 2010 conversion before 2012 would accelerate the year if which the conversion income must be reported. Therefore, the 2 year deferral cannot be used as a cash flow strategy to take out the funds while still deferring the taxes for two years.
Permalink Submitted by Kathy Patterson on Fri, 2010-04-02 19:51
the five year holding does not apply to conversions if the client reaches age 59 1/2 ? thank you.
Permalink Submitted by Alan Spross on Fri, 2010-04-02 21:10
Correct. Any conversions done prior to 59.5 for which the 5 year clock is running become exempt from the penalty at age 59.5.