Moving money from a 401(k) into a Roth IRA after you left a job used to be a Texas two-step: You had to transfer the assets into a traditional IRA first, then convert that to a Roth. Now you can waltz directly into a Roth.
In order to make such a conversion, your annual adjusted gross income has to be $100,000 or less, whether you're single or married. But come 2010, when the income-eligibility limit disappears, that move will get easier, too.
When you convert to a Roth, you'll owe taxes on the entire amount you roll over -- assuming you made all your 401(k) contributions with pretax money.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
But a Roth conversion is still worth considering because all future distributions, including earnings, can be withdrawn tax-free after age 59 1/2, if you've held the Roth for at least five years. Plus, you won't have to take required minimum distributions from a Roth after 70 1/2, as you do with a traditional IRA. And your heirs can inherit the money tax-free.
But don't try this strategy unless you can afford to pay the tax bill with funds outside your 401(k). Tapping your retirement account to pay taxes would mean owing an early-withdrawal penalty if you withdrew the money before age 55. Even worse, you'd lose the opportunity for years of tax-free growth.
-
Stock Market Today: Stocks Rally Despite Rising Geopolitical TensionThe main indexes were mixed on Tuesday but closed well off their lows after an early flight to safety.
-
What's at Stake for Alphabet as DOJ Eyes Google's ChromeAlphabet is higher Tuesday even as antitrust officials at the DOJ support forcing Google to sell its popular web browser. Here's what you need to know.
-
457 Plan Contribution Limits for 2025Retirement plans There are higher 457 plan contribution limits for state and local government workers in 2025 than in 2024.
-
Medicare Basics: 11 Things You Need to KnowMedicare There's Medicare Part A, Part B, Part D, Medigap plans, Medicare Advantage plans and so on. We sort out the confusion about signing up for Medicare — and much more.
-
Six of the Worst Assets to Inheritinheritance Leaving these assets to your loved ones may be more trouble than it’s worth. Here's how to avoid adding to their grief after you're gone.
-
SEP IRA Contribution Limits for 2024 and 2025SEP IRA A good option for small business owners, SEP IRAs allow individual annual contributions of as much as $69,000 in 2024 and $70,000 in 2025..
-
Roth IRA Contribution Limits for 2024 and 2025Roth IRAs Roth IRA contribution limits have gone up. Here's what you need to know.
-
SIMPLE IRA Contribution Limits for 2024 and 2025simple IRA The SIMPLE IRA contribution limit increased by $500 for 2025. Workers at small businesses can contribute up to $16,500 or $20,000 if 50 or over and $21,750 if 60-63.
-
457 Contribution Limits for 2024
retirement plans State and local government workers can contribute more to their 457 plans in 2024 than in 2023.
-
Roth 401(k) Contribution Limits for 2025retirement plans The Roth 401(k) contribution limit for 2024 is increasing, and workers who are 50 and older can save even more.
