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Tax Guide

401k & Retirement Rollovers Explained

401k & Retirement Rollovers Explained
Ines Zemelman, EA
01 September 2017

401k to Traditional IRA

Rollover from a 401K to a Traditional IRA is a non-taxable event. You can rollover the 401K from your former employer to a Traditional IRA for more options and better control of your retirement portfolio (please contact your financial advisor for investment advice).

401k, 403(b) or Traditional IRA to ROTH IRA

If you want to rollover a 401K, 403(b) or a Traditional IRA to ROTH IRA the rollover amount would be taxable as if it were a regular distribution (however, with a rollover the 10% penalty for early withdrawal will not apply).

If your employer plan or Traditional IRA consists of pre-tax and after-tax money then the amount that you choose to rollover to ROTH will be pro-rated the same way as your total portfolio is distributed between the deductible and the non-deductible parts. You cannot choose to roll over the non-deductible part to avoid tax on the transfer.

If, for example, your IRA account has $6,000 in nondeductible contributions and $24,000 contributions that have not been previously taxed, then 20% (6/30) of your conversion would be tax-free and 80% will be taxed at the ordinary tax rate.

It is important to keep track of non-deductible contributions to IRA by filing form 8606 with your annual tax return each year where contributions were not deducted from your income.

If it’s taxable - how much do I owe?

We can prepare a tax projection to calculate the anticipated tax consequences of the incremental income resulting from the rollover. As opposed to contributions to ROTH IRA, the rollover should be made no later than December 31 of the tax year, therefore you have to plan this important financial decision and avoid unexpected tax bill.

The best time to initiate the rollover is in the year where your income is lower than usual (i.e. temporary unemployment or business loss). Then tax on the rolled over amount will be lower too.

Ines Zemelman, EA
founder of Taxes for Expats