Rule simplifies Roth rollover

Don Taylorq_v2.gifDear Dr. Don,
I'm currently unemployed and I have a 401(k) still with my previous employer. Can I convert the 401(k) plan to a Roth IRA by transferring the money from the 401(k) to a traditional IRA before converting it to Roth IRA? Or, can I convert it directly from a 401(k) to a Roth?
-- Tuyen Taxing

a_v2.gifDear Tuyen,
You no longer have to take the intermediate step of rolling the money into a traditional IRA before moving the money into a Roth IRA. The law changed with the 2008 tax year.

Here's part of what IRS Publication 590, Individual Retirement Arrangements, has to say about the change:

Prior to 2008, you could only roll over (or convert) amounts from either a traditional, SEP, or SIMPLE IRA into a Roth IRA. Beginning in 2008, you can roll over into a Roth IRA all or part of an eligible rollover distribution you receive from your (or your deceased spouse's):

  • Employer's qualified pension, profit-sharing or stock bonus plan (including a 401(k) plan),
  • Annuity plan,
  • Tax-sheltered annuity plan (section 403(b) plan) or
  • Governmental deferred compensation plan (section 457 plan).

Other rules also apply, so it's important to carefully read the relevant portion of IRS Publication 590 or to consult with a professional financial or tax adviser who understands the rollover rules.

You haven't given me any details about your financial situation, other than you're currently out of work. I recommend running your plan to roll over your 401(k) to a Roth IRA by your tax professional to see if he or she thinks it's the right thing for you to do.

To ask a question of Dr. Don, go to the "Ask the Experts" page, and select one of these topics: "Financing a home," "Saving & Investing" or "Money." Read more Dr. Don columns for additional personal finance advice.

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