Since the advent of Roth IRAs in 1997, millions of investors have converted their traditional IRAs into Roth IRAs, or else rolled their qualified plan balances into traditional IRAs, and then converted the rollover balance into a Roth IRA. But the Pension Protection Act of 2006 now allows qualified plan participants to roll their 401(k), profit sharing or other qualified plan balance directly into a Roth IRA, without having to roll it first into a traditional IRA.
Therefore, if you are retiring from your current job and want to see your company’s savings plan end up in a Roth IRA, don’t request rollover paperwork to a traditional IRA; you can now skip the “middleman” account and move your money directly to the Roth. This new rule greatly simplifies the process for qualified plan participants wishing to convert their plan balances into Roth IRAs. Of course, the same restrictions apply with the new rule as with the old: an individual’s modified adjusted gross income must be less than $100,000, including the Roth rollover/conversion balance. The conversion balance will be taxed as ordinary income the same as from a traditional IRA to Roth IRA conversion. So when you roll over your account from your company’s plan to the Roth, be aware that this is a taxable event. Like with traditional IRAs, a full conversion might not be possible in one year; you might have to spread the conversion out over several years in order to convert the full balance. Your tax advisor will be able to help you determine the best way to do this.
One important point to remember for those who have company stock in their retirement plans is the NUA (net unrealized appreciation) rule, which grants you to sell your company stock in a separate transaction that will be taxed as a capital gain instead of ordinary income. If you plan on selling the stock separately, be certain not to include it when you roll over the balance to a Roth IRA.
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