If you are a baby boomer and you have either lost your job, left your job for a new one or retiring, then you have an important choice to make regarding your 401k plan.  If retirement is here (Congratulations!) then the most common approach is rolling over the 401k into a traditional IRA.  This process is very easy and allows you to continue the tax deferral process.  With the  AGI limits on Roth IRA conversion now being non existent in 2010, you now have the choice to do a direct rollover of your 401k into a Roth IRA.  There, of course, is a tax consequence for doing so.  Does rolling over your 401k into a Roth IRA make sense for you?  Let’s find out.

photo credit: jayallen

How the Rules to Rollover 401k into a Roth IRA have changed.

Before 2010, it was much more difficult to rollover your 401k into a Roth IRA.  You have to follow the below steps, but could only do so if you didn’t exceed the phaseout limits.

1. Open a traditional IRA account with a brokerage firm
2. Rollover your 401(k) from your employer to your traditional IRA account
3. Open a Roth IRA account
4. Convert the  traditional IRA account to the Roth IRA account.

As you can see, the process is a bit of the pain in the butt. Now the process is much more streamlined and much easier.

The Roth IRA to 401k Rollover Process

Now the process can be completed in two easy steps:

• #1: Open a Roth IRA Account.
• #2: Contact your human resources department who may send you to the 401k plan administrator. Request the rollover paperwork and complete it.  Somewhere on the form, you should now have the option to roll it directly into a Roth IRA.

Recap on Roth IRA Conversion Rule 2010

For 2009, you and/or your spouse are limited to $100,000 AGI to do the the Roth IRA conversion.  That also applies to converting from a 401k, as well.  In 2010, anybody will be able to take all their traditional IRA’s and old retirement plans and convert them to a Roth IRA.  The amount you convert will be taxed, but you can spread the bill over three years. (The tax would be deferred in 2010. Then 50% would be paid in 2011 and the rest in 2012.)

What If the Rollover Check is sent directly to me?

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If you receive a distribution check from your 401k rollover to a Roth IRA then chances are they will hold around 20% for taxes. If you want a direct 401k rollover to a Roth IRA, you may want to send that check back to your employer 401k provider and ask to be sent all of your eligible retirement distribution directly to your new Rollover IRA account (not as a check, or they will just give you 80% again). You have 60 days upon receiving the check to get the money into the Roth IRA- no exceptions!  So don’t procrastinate on this one.

What About the Roth 401k?

If you already had a Roth 401k at work, then the process is that much simpler. You don’t have to worry about implementing a conversion.   You would just roll the Roth 401k directly into the Roth IRA.

Does it Make Sense to Roll Into the Roth IRA?

Rolling your 401k into a traditional IRA makes sense most of the time for many reasons.   But rolling all your 401k into a Roth IRA takes some careful planning and reasoning.  Here are a few reasons that you might want to consider:

• If you are officially retired and do not expect to have a considerable income in the year that you convert
• You expect the taxes to keep increasing through your golden years
• You have beneficiaries that you want to benefit from the Roth IRA

You Can Rollover Your 401k by Following These Steps

1. You have to have a Roth IRA open/established before you can do any of this.
2. Don’t forget about the AGI limits if you are doing this in 2009.
3. Rolling from a traditional 401k to a Roth IRA will be a taxable event.