Rollover 401K to a Roth?

[SteveNU]

My sons girlfriend asked me a question about rolling her 401k into a IRA. She says the place where she is working is discontinuing their 401K and they need to open an account to roll it into. I don't have a lot of details but wanted to throw the question out there. I was wondering if it would be possible to roll it into a Roth IRA, she is only 24 right now.

 

[Animorph]

Probably, though a tIRA could also just be a step along the way. Depending on the size of the rollover, she might not want to roll it all into a Roth if that puts her in a higher tax bracket. It would all count as regular income. A rollover into a tIRA would be tax free, with a little care. Then she can portion it out into a Roth if that makes sense. Given a low income now, it might make sense to consider the Roth.

 

[SteveNU]

She probably only makes $20 to $25,000 a year and only has about $2,000 in the account.

 

[David1961]

She should be able to either transfer the amount into a regular IRA or convert it to a Roth IRA. If she converts to a Roth IRA, her taxes will probably increase, depending on the amount that is in the 401k and her tax rate.

 

[Rustward]

She probably wants a traditional IRA for the rollover. Conversion to a Roth after the rollover is probably a good move for a young person. Given the information you presented, this would likely be the best path for her to take.

 

[2B]

Call Vanguard on her options. She can definitely roll it over to an IRA and from there to a Roth. I don't know if it can be done in one move.

 

[pb4uski]

I think it has to be two moves - one from 401k>tIRA and then from tIRA to Roth IRA - but Vanguard can tell her for sure.

She needs to do the first move. The second is optional. She can do a projected tax return for 2013 and then add in the $2k Roth conversion and see what the tax cost is. If the tax cost isn't very much, then it is probably worth doing in the long run.

 

[Mike Piper]

These days, it should be able to be done in one move, if she wants to.

http://www.irs.gov/pub/irs-drop/n-08-30.pdf

 

[pb4uski]

Cool. I guess the advantage of doing it in two moves is you could chose to do it when convenient or in stages if you want.

 

[Alan]

Cool. I guess the advantage of doing it in two moves is you could chose to do it when convenient or in stages if you want.

Or when the market falls. We haven't done our ROTH conversion this year. If the market drops a lot over the budget and/or debt ceiling decisions then I'll take the opportunity to do this year's rollover. Using Turbotax for tax estimates I know what $ amount I want to convert, and if it happens to be at a much lower NAV price then a larger % of the IRA gets converted.

 

[pb4uski]

So you are a market timer after all. I never would have guessed that.

 

[Alan]

So you are a market timer after all. I never would have guessed that.

Guilty as charged