Roth IRA Conversion Questions – 401k, Multiple Accounts, Taxes

Answers to a dozen frequently asked questions about converting to a Roth IRA

1. Can I take my 401 (k) and turn it into a Roth IRA how can I roll over from 401 (k) to IRA?

This is possible. As long as the plan participant is eligible to receive a distribution from the plan and the funds are eligible for a rollover, then a 401 (k) can be converted. In addition, so can 403 (b) and 457 plans. It is recommended that you verify if your current plan will allow in-service distributions. This will make those funds convertible now instead of having to wait until it stops working.

2. Can I do a partial conversion?

Yes. You can determine the amount of your traditional IRA that you want to convert.

3. What if I have a traditional non-deductible IRA?

Now you will have to consider the total value of all IRA accounts when converting. For example, if you have $ 500,000 in four accounts and one has $ 50,000 in after-tax contributions, only 90% of the converted amount will be taxed.

4. Paying your taxes with the piper

Some people will say that it is okay to use funds from your IRA account to pay the tax bill that is owed. Other people say this is a bad idea. Using your funds in your IRA account to pay taxes is not recommended because if you choose to undo the conversion, all funds that were taken from the IRA that were used to pay taxes cannot be returned to the account when it is re-characterized. You want to top up the account for a number of reasons, even if the account lost significant value between 2010 and 2011.

5. Can you convert to multiple new Roth IRAs instead of just one?

Yes, you can do this. It is best to consider converting to separate Roth IRAs that do not contain other funds from other IRAs from previous years. It is best to convert to more than one Roth IRA and it is recommended that you convert to multiple Roth IRAs, each with a different investment type. This will make it easier to undo the conversion if the particular investment doesn’t work. This is an opportunity to remove the losing IRA from the picture to qualify for a lower tax bracket. If you do, the winning IRAs will grow, eventually generating tax-free earnings for you later in life.

6. When to convert some of your traditional IRA accounts in 2009?

This is a common and good question. If you think your tax bracket in 2009 will be lower, it may be a good idea to start the conversion this year. Keep in mind; you do not have to convert the full amount into the traditional IRA. You can do a partial conversion this year and then convert the rest in the next year.

If you still have questions about the Roth IRA conversion process, consult with a professional. Financial professionals will be able to help you determine if the conversion will be best for you. They will also have the answers to any other questions that were not presented here.