Yes, You Can Roll Over a 401(k) into a Roth IRA

An employee who leaves his or her job can roll over the assets in a 401(k) account directly into a Roth IRA. Yet more than half the respondents in a Fidelity Investments survey released April 28 didn't know this was an option.

Only one-fourth of the respondents said they had ever considered rolling 401(k) assets from a former employer to a Roth. Yet, after they were told about the benefits of a Roth IRA, nearly 60% said they would investigate rolling their 401(k) into one. Here's why you should consider it.

-- Starting this year, there no longer is an income limit on converting to a Roth. Before 2010, you could not make the switch if your adjusted gross income was more than $100,000, whether married or single. See FAQs on the New Roth Conversion Rules to learn more.

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-- You won't have to pay taxes on Roth withdrawals in retirement -- but you would have to pay taxes on withdrawals from a traditional IRA (which many people roll their 401(k) assets into after leaving a job). See Why You Need a Roth IRA to learn more about the benefits of this retirement-savings account.

-- You’ll generally owe taxes on the 401(k) amount you convert to a Roth if you made only pretax contributions to the 401(k). If you convert your traditional IRA to a Roth in 2010, you can spread the tax bill over two years. You report the first half of the conversion on your 2011 tax return (which you file by April 15, 2012) and the balance on your 2012 return. See How to Finance a Roth Conversion to learn more about paying the tax bill.