Why can you rollover a traditional IRA to a Roth but, you can't rollover a 401k to a Roth?

Answer 1

When your rollover a traditional IRA to a Roth, don't you have to pay income taxes on the funds? If you want to rollover a 401K to a Roth you would have to pay income taxes on the whole amount. You're better off to just leave that 401K in a tradional rollover IRA and deal with paying income taxes as you withdraw the funds.

Answer 2

You are misinformed. Direct conversions from a 401k to a Roth IRA used to be disallowed, but that was changed by the Pension Protection Act of 2006. Quoting from the following link, "The Pension Protection Act allows a direct rollover from a 401k to a Roth IRA, with the rollover treated as a Roth conversion." You no longer need to use the indirect route of first rolling the 401k into a traditional IRA and then converting to a Roth.

Naturally, you will owe taxes on the conversion, just as you would if you were making the conversion from a traditional IRA.

I suggest you contact the custodian of your Roth IRA for details about the conversion process.

Answer 3

When you roll a Traditional IRA to a Roth IRA, you need to pay a conversion fee to the IRS. So while its possible, it does cost you money to do it.

I guess in theory, you could roll a 401K to a traditional IRA, then convert to a Roth and pay the fees. They're going to tax the money that moving from the Traditional to the Roth so its can be quite expensive if you're moving

Generally you can't get out of a company sponsored 401K unless you're no longer employed by that company.

There is a ROTH 401K now available (if your employer offers it) which can be rolled into a Roth IRA later on. This would probably be a better investment choice that the Traditional 401K is you're at least 5 or 10 years out to retirement. You lose the income deduction but the contributions grow tax-free.

Answer 4

This has to do with tax laws. A 401(k) is a "pre-tax" account, but you pay taxes on the money when you pull it out. A Roth is taxed going in, but you pay no taxes when you make a withdraw. If you would prefer to go with a Roth, you would have to roll your 401(k) into a traditional and then TRANSFER the traditional into the Roth (this is not considered a roll-over). However, this is going to have an effect on your tax return because you will have to pay taxes on that money up front. I did hear a rumor that they will begin allowing direct rollovers from 401(k) to a Roth, but I haven't confirmed that.

Answer 5

you'll lose 20-30% or more of your money to taxes and penalty - why do you have a Roth IRA at all?