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Do A Direct 401(k) To Roth Rollover

In the not-so-distant past, it wasn’t particularly easy to roll over funds from a 401(k) plan to a Roth IRA, which can provide tax-free income during retirement or for your heirs. Now, it’s a relative snap. What’s more, the IRS recently provided guidance on how to complete this maneuver.

Prior to the Pension Protection Act of 2006 (PPA), it took two steps to complete a 401(k) to Roth rollover, and it was possible only if your income didn’t exceed a specified limit. First, you transferred funds from your 401(k) to a traditional IRA. Next, you converted the traditional IRA to a Roth, paying income taxes on the amount of the conversion. But you could do this only in a year in which your modified adjusted gross income (MAGI) didn’t exceed $100,000.

The PPA fixed part of the problem. Beginning in 2007, you were allowed to roll over funds directly from a 401(k) plan to a Roth, bypassing the traditional IRA. But you still might have been blocked by the $100,000 limit.

That impediment no longer exists. Based on a tax law change that took effect in 2010, you may now convert to a Roth regardless of your annual MAGI. (For conversions that were completed in 2010, you were able to split taxable conversion income between 2011 and 2012. That allowed  you to postpone the tax hit of converting to a Roth, and may have saved tax  overall.)

The IRS recently issued rulings clarifying aspects of a direct rollover. The guidance included these points:

This is just an overview. We can work with you to weigh the merits of a Roth conversion and help you follow the rules governing such transfers.