Transfer from 401(k) to Roth IRA?

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Dear Dr. Don,
I participate in my employer’s 401(k) plan. I am interested in opening a Roth IRA through my local credit union where I do my banking. Is it possible to take money out of my 401(k) and directly transfer it to a newly created Roth without penalty? If possible, how complicated is it? Also, if the IRS does allow this, what is the maximum amount you can transfer per year?
— Charlie Choices

Dear Charlie,
In general, unless you’re over age 59½ or face a financial hardship, you’d have to leave your job to have the portability you seek in your 401(k). Separation from service gives you the option to do a rollover contribution to a Roth IRA. Until then, you need to make your best investment decisions among the options offered you in your employer’s 401(k) plan.

The IRS Publication, 401(k) Resource Guide — Plan Sponsors — General Distribution Rules, provides more background information on distributions, as does IRS Publication 575, Pension and Annuity Income.

You can also review the plan documents from your employer. The plan documents will spell out your ability to withdraw your elective deferrals prior to your separation from service.

If you don’t like the plan’s investment options, you can lobby your employer for more choices and/or lower-cost options. You didn’t supply any specifics about your portfolio or investment goals for your retirement savings, but a Roth IRA with your credit union, unless you’re talking about the brokerage arm of your credit union, is a very conservative choice for a Roth IRA account.

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