[c1pher]

Before I talk to my money guy, is anyone familiar with this and can I go from a 401k to Roth if I have an employment change? Any tax implications?

[kscarrol]

Of course get proper advice from a professional but as I understand it you roll the 401k into a traditional IRA. That move has no tax implications. To roll the IRA into a Roth IRA you essentially liquidate the traditional IRA, pay the tax and then move the after tax dollars into the Roth IRA...

[c1pher]

Originally Posted by kscarrol

Of course get proper advice from a professional but as I understand it you roll the 401k into a traditional IRA. That move has no tax implications. To roll the IRA into a Roth IRA you essentially liquidate the traditional IRA, pay the tax and then move the after tax dollars into the Roth IRA...

So a lot of tax to pay lol.

[Winn.Nguyen]

It all depends on the company you're moving to. If your new company allows Roth contributions, they may want to keep both money types separated. Your new Roth deferrals will have it's own "bucket" and so will your pre-tax deferrals.

If you're doing a direct rollover, in most cases it'll be dollar for dollar into the same money source. Meaning if you have X amount of pre-tax rollover monies, it'll be moved to your new 401k plan as pre-tax monies. Now, there are some 401(k) plans that allow Roth conversions (this will need to verified with your new company) with the assistance of their provider (John Hancock, for example), while other companies may require you to process an Indirect Rollover instead. If you end up with this option, you'll receive your balance as if it's paid directly to youself. At that point, you'll have 60 days to work on the conversion with your tax guy. It's important to get it all done as soon as possible, because if you miss the 60 day limit, Uncle Sam will count it as a distribution and it will become a taxable event. You'll pay a minimum of 20% Fed tax, whatever applicable state tax, and a possible 10% IRS penalty (if you're younger than 59.5 years of age). For example, where I'm from, at the least, l would see a total of 40% of my balance gone. Keep in mind, this pertains to pre-tax balances. Roth balances have different provisions.

The Roth conversion formula will be based on your most recent tax bracket. Be ready to see a chunk of change go away, but know that you would've had to pay that eventually. The same thing will apply if you were just moving this to a personal account.

[kscarrol]

Bottom line, 401k and traditional IRA's are pre-tax contributions that get taxed as you withdraw money during retirement. The idea is that at that point your taxable income is lower so the withdrawals are taxed at lower rates. Roth IRA's are after-tax contributions with no tax paid as you withdraw during retirement. At some point, Uncle Sam will extract his pound of flesh!

[shadow191]

Not official advice but I managed the retirement team at my last job where we did a lot of plan design and ensured plans complied with rules.

You cannot go directly from a pre-tax 401(k) to a Roth IRA when you change employment. You would have to roll the money out into a traditional IRA and then convert but you would pay income on any amounts converted. Be careful as any amount you convert gets added to your taxable income and can change your bracket.

Some plans (very few) now allow for in plan Roth conversions but same rules around taxation apply.

If you already have pre-tax and Roth money in your 401(k) and want to rollover into IRA's, you will need both a traditional and Roth IRA. The plan will cut 2 checks as the funds cannot be mingled.

FWIW, a backdoor Roth isn't what you are describing. It's when someone who is over the income limit for a Roth IRA contributes to an after-tax IRA and then converts that to a Roth. Since it's an after-tax IRA, there would only be taxation on the gains and if you do the conversion shortly after contributing, there shouldn't be much gains so you've effectively gotten around the Roth income limit.

Originally Posted by MGM135is

Before I talk to my money guy, is anyone familiar with this and can I go from a 401k to Roth if I have an employment change? Any tax implications?

[Hawkeye]

Originally Posted by shadow191

FWIW, a backdoor Roth isn't what you are describing. It's when someone who is over the income limit for a Roth IRA contributes to an after-tax IRA and then converts that to a Roth. Since it's an after-tax IRA, there would only be taxation on the gains and if you do the conversion shortly after contributing, there shouldn't be much gains so you've effectively gotten around the Roth income limit.

This. And there is a $5,500 limit per year. And you definitely do not want to have and funds left in the traditional IRA when the year ends otherwise the accounting gets all funky and you have to keep track of prorations.