Can i convert a 401k directly to a Roth IRA? After, how much can i withdraw from Roth Tax free?

Question

I'm thinking of moving 16,000 from 401k to a Roth IRA. I realize I will have to pay $4000 in taxes (in cash--to avoid 10% penalty) to do so.

Do I need to covert to traditional IRA and THEN to a Roth. If so, is there a length of time it has to be in the Tradional IRA before converting.

And, finally...what i really want to know. How much of the 16,000 converted can i withdraw from the Roth without penalties? I know you can withdraw up to your contibutions in a "regular" Roth, but what is considered my "contributions" in this case?

BASICALLY -- can i turn 16,000 from my 401k into 16,000 in Roth IRA money and turn it into everyday cash to use?

I would like to take some money of out my 401k, but I don't want to do a loan.

MORE ABOUT ME:

I am only 25 years old and have around 28k in my 401k from former employer. Believe it or not, im opposite of most peopel and have been saving too much for retirement and need some to live on!

Answer 1

Assuming you paid into the 401(k) pretax and pay the taxes, you can transfer directly into a Roth IRA. It is not, however, the payment of those taxes that avoids the 10% penalty (I'm assuming you're under 59 1/2). That penalty will still be deducted if you don't either make a direct transfer, or have payment made out to the gaining institution rather than yourself. If the penalty was deducted, and you deposited into the new IRA within 60 days, you would recoup the penalty upon filing your income taxes.

Again, assuming you are under 59 1/2, a loan is probably the best way to access your 401(k) funds.

Answer 2

For tax purposes, it should count the day the money is actually transferred. Might I ask why you are rolling into a ROTH IRA? If you roll into a ROTH, you must pay taxes up front, plus a 10% penalty if you are not of retirement age yet. I HIGHLY suggest rolling the funds into a regular IRA because you will avoid the 10% penalty and defer the taxes until you take it out. ROTH IRA accounts can be a great investment since the earnings on your money are tax-free. But it doesn't make sense to pay a 10% penalty to get that tax benefit when you can get tax defered investment in a traditional IRA without a penalty. Edit: Even with 0 taxes, you'll still pay the 10% penalty.

Answer 3

To do the conversion, you must first convert roll the 401k over to a traditional IRA. There is no length of time needed for the funds to stay in the traditional. The trad. IRA can then be converted into the Roth IRA. At this time you should pay the taxes from your cash on hand. The money will be taxed at ordinary income rates. There is no 10% penalty involved at this stage. Once the money is converted, all of the "basis" is available for withdraw without penalty. This is because you have already paid taxes on the money. The only money that is restricted from withdraw is the earnings that will accrue on your new basis. But the 16k will be completely liquid.

Answer 4

Hi Brad: I don't have enough info to answer your questions?
Yes, a Roth IRA is the way to go? You didn't say how old you are? Age becomes a factor when withdrawing? There are some "Special" circumstances for drawing money (early) from
a 401K, I think education and buying a first home might be special?
Any money in a "Traditional - Individual Retirement Account (IRA)
is taxable, as I am sure your 401K money is also? Some have penalties for early withdrawal (401Ks!) but even special circumstances, income taxes must be paid! and any penalties, (you mentioned 10%) ur tax rate, + 10 % sounds like about
35% to me?
401K money can be rolled over to an IRA (tax free)
because both are taxable programs upon withdrawal!
Now, how to convert to a Roth IRA? Drawing it out, paying tax,
and rolling it over into a Roth? I think, only, if you are a certain age, without pentalties? You had better check on that one?
When you get a certain age, I think it is 70 1/2, you have to start drawing a portion of an IRA each year, declaring it as income and paying tax on it! Or after you pay the tax, at that point it can be rolled over into a Roth IRA, where earnings are tax free,
can pass to heirs, withdrawals are tax free! etc. Be carefull,
when you draw it out, that it doesn't throw you into a higher
tax rate, because it is added to your other incomes!
Uncle S. wants his portion of that IRA and 401K money because you didn't pay tax on that portion, prior! Roth IRAs is AFTER Tax income, so Uncle Sam is not in that picture!
Can you turn your $16,000 from 401k into an ROTH IRA,
and start using it to live on? Don't think so, but again your age is important there? and the $16,000 will be reduced by your Income Tax rate x that amount before it gets to Roth!
Good Luck, I hope that I was able to help you!

Answer 5

Where I work, you can't roll out of your 401k unless you quit. The money is there for the duration of employment or getting a "loan" from it which would have to be paid back.

If you don't need the money, I'd say your best bet is to leave your 401k money where it is and just start a ROTH with new money. You can even reduce the percentage invested in your 401k and faithfully devote that to the new ROTH.

That way, you're still saving and also avoiding tax consequences by cashing out the 401k/traditional IRA.

You're young enough that you have many working years ahead of you. And, at this point, you don't know your tax situation at retirement so having taxed and tax-free money might be a good thing.

When I changed employers, we didn't have to convert to a traditional and then to a ROTH. If we wanted to take the tax hit we could go directly to a ROTH from the old 401k. Check with your plan administrator, they should let you know what you can and can't do with your 401k money. Also, you should check with a tax specialist to help you figure out the tax consequences of your choices.