Rolling a 401(k) Over to a Roth

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Rolling a 401(k) Over to a Roth

You'll owe taxes on the amount you convert, so consider this strategy to lower your tax bill.

I will be losing my job in the next few months and am not sure whether to leave the money in my workplace retirement account or roll it into a Roth IRA. If I decide on a rollover, how do I go about it?

SEE ALSO: Why You Need a Roth IRA

Rolling your money from a 401(k) to a Roth can be a good idea. Unlike a 401(k), a Roth lets you tap your contributions tax- and penalty-free at any time, and you can withdraw the earnings tax-free when you turn 59½. (The withdrawal rules are a bit more complicated after a conversion -- see Roth IRA Withdrawal Rules for details.) Plus, there are no required minimum distributions after you reach age 70½.

The downside to this strategy is that you’ll owe taxes on money you convert from a 401(k) to a Roth for the year you make the conversion, and converting the entire 401(k) to a Roth in one year might bump you into a higher tax bracket. Because money may be tight while you look for a new job, consider rolling your 401(k) into a traditional IRA and gradually converting money from that account into a Roth.

You can open an IRA account with a brokerage firm, mutual fund company or bank. Look for an administrator that has low fees and good investment choices. TD Ameritrade, for example, has no minimums or annual fees and lets you invest in stocks, bonds, mutual funds or anything else available to brokerage customers.

There’s no income limit for converting money from a traditional IRA to a Roth, but there are income and contribution limits for new contributions. For details, see 2013 Retirement Account Contribution Limits.

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