Routing Into a Roth from Elsewhere


In What to Do With Your Retirement Plan Money, I outlined much of what you may want to know about retiring and/or leaving your job and taking that 401(k) money with you. But, in light of my series of articles on individual retirement accounts (IRAs) and the like, you may have decided to "jump into" a Roth IRA from another retirement plan. So, here's a summary of how to transfer money to this newer IRA.

From a Traditional IRA

Ø First, to qualify for a Roth at all, you must have an annual adjusted gross income (AGI) of $100,000 or less.

Ø Next, any earnings that are transferred from your traditional to Roth IRA will be taxed as regular income. Remember, these earnings have been tax-deferred until now, and the Roth IRA offers only tax-free earings after a given amount of time, so it's time to pay taxes.

Ø If your have not made any deductible contributions to your traditional IRA, then these non-deductible contributions will not be taxed when transferred, as they are contributions made in after-tax dollars. However, deductible contributions will be taxed.

Ø Fear not - your transfer from a regular IRA directly into the Roth willl not trigger that noxious 10% penalty tax for early IRA withdrawals.

From a 401(k)

As mentioned in my last piece - and it's worth reviewing again - a 401(k)-to-Roth transfer isn't possible (at least, until legislators get wise and change the rules). No, I have NO idea why this is. However, you can get into a Roth with your 401(k) stash by opening a traditional IRA first. Then, transfer into the Roth.

From an Annuity

As I mentioned to one reader who wrote in, the Internal Revenue Service (IRS) remains "cagey" about whether you can make an annuity-to-Roth transfer. Remember, though, that the Roth is a fairly new innovation (1997-98), and the IRS is slow to react on some things. For now, I would recommend taking the same route as with the 401(k)-to-Roth transfer, using the traditional IRA as the middleman.

The copyright of the article Routing Into a Roth from Elsewhere in Retirement Planning is owned by Ann Needle. Permission to republish Routing Into a Roth from Elsewhere in print or online must be granted by the author in writing.

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