Qualified plans such as 401k plans funded with deductible contributions require distributions every year starting the year you turn age 70 1/2. Most 401k plans are funded in this traditional fashion. While there is nothing you can do to defer the IRS requirement for an annual required minimum distribution (RMD), you can restructure the account into an after-tax Roth IRA. While the taxes will be paid on the converted amount, you no longer will be mandated to take an RMD each year.
Call your 401k plan administrator and request a rollover package. Contact information for the 401k plan administrator is located on your account statement.
Open a rollover IRA at a custodian of your choice. Local banks and brokerage firms offer different IRA custodian services and investments. Make sure that the custodian you choose offers Roth IRA services.
Complete the rollover paperwork from your 401k administrator using the new rollover information to direct where the funds should go. Include the rollover account number, custodian's name and address. Submit the paperwork to the 401k custodian. If the money is moved via a trustee-to-trustee transfer, you never touch the money and funds go directly into the Roth IRA.
Complete the Roth conversion paperwork with the new IRA custodian. You are allowed to convert a rollover IRA into a Roth IRA.
Add the converted amount to your annual income taxes. The 2011 IRS regulations require paying income taxes on the converted 401k assets when filing in 2012. Occasionally, legislation allows spreading the payments over two or more years.
Hold the IRA for at least five years to meet normal distribution regulations. Once you meet this requirement, Roth IRA distributions are tax-free.
Although you pay taxes when converting, the assets grow tax-free. This can lead to substantial savings over the years if you don't need the money right away.
Speak with a tax adviser before converting to a Roth IRA. It is important that you understand all tax implications and ensure you have the assets to cover the tax bill for converting.
- Although you pay taxes when converting, the assets grow tax-free. This can lead to substantial savings over the years if you don't need the money right away.
- Speak with a tax adviser before converting to a Roth IRA. It is important that you understand all tax implications and ensure you have the assets to cover the tax bill for converting.
With more than 15 years of professional writing experience, Kimberlee finds it fun to take technical mumbo-jumbo and make it fun! Her first career was in financial services and insurance.