Tax Deferred to ROTH within 401K
Can tax deferred funds within a 401K plan be converted/rolled over to Roth/tax exempt funds within a 401K plan? IRS pub 590 is vague on this and I was wondering if there are any more definitive answers.
I know I can close the 401K plan and move the funds over to a Roth IRA, but can the conversion be done within the 401K plan without closing the 401K plan?
Thanks.
Robert
Permalink Submitted by Alan Spross on Wed, 2008-12-10 23:27
No, a conversion from a pre tax account to a designated Roth account is not permitted, however a direct conversion from the pre tax account to a Roth IRA is permitted.
Within a 401k, the pre tax and Roth accounts are to be completely separate. Not only is a conversion not allowed, but a regular contribution cannot be recharacterized to another type of contribution either.
Permalink Submitted by Robert Taylor on Thu, 2008-12-11 00:34
Alan,
I must have misundertood Ed’s book then. I thought this was possible as of 2008. Thanks for the clarification.
So to recap, if I want to invest with Roth funds in my 401K account, they must start as Roth contributions from the very beginning. Is that correct?
Thanks,
Robert
Permalink Submitted by Alan Spross on Thu, 2008-12-11 01:07
Yes, there is no way to make pre tax 401k funds into Roth 401k funds unless they are originally contributed as such.
With respect to Ed’s book, I think you must have been looking at the various options to move all of the following to a Roth IRA:
1) Regular 401k funds – basically a direct conversion
2) Roth 401k funds – in a rollover to Roth IRA
3) Inherited Regular 401k funds – transfer or rollover to Roth IRA
The only source of addition to Roth 401k funds other than regular contributions is the transfer of one Roth 401k balance to the Roth 401k of a new employer.
Permalink Submitted by Robert Taylor on Thu, 2008-12-11 01:18
Alan,
Thank you again. You are probably right about my confusion in Ed’s book. I had just picked up on the following and assumed that mean within the 401K.
“Your Complete Retirement Planning Road Map” on page 276 that “as of 2008 you will be able to roll your employer funds to a Roth”. This must have been a reference to being able to do this without having to go through a traditional IRA first. My misunderstanding obviously.
Thanks again for your clarification on this. I appreciate it very much.
Robert
Permalink Submitted by Alan Spross on Thu, 2008-12-11 04:39
That’s it. Perhaps he should have said “Roth IRA”, now that there are two types of Roths.