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My previous employer offered both a Roth and a Traditional 401k (unclear to me if these are technically separate accounts... as far as I was functionally aware, I had one 401k account, which could have contributions split between Roth and traditional). I split my contributions into these roughly 50/50. I have recently left this employer and wish to roll over the 401ks into IRAs. I have a few questions related to this:

  • Since the 401k is half traditional and half Roth, does this mean I need a traditional IRA to receive the rollover of the former, and a Roth IRA to receive the rollover of the latter? Or can I just roll over the entirety of the 401k into a Roth IRA?
  • Since this would be a rollover, not a contribution, the rollover amount is not subject to any IRA yearly contribution cap, nor would it be subject to income limits on a Roth IRA contribution (ie normally, if I make over $137k, I can't contribute to a Roth IRA), right?
  • What happens to my specific funds? My employer had only a set list of funds in which I could contribute. Now that they will be rolled over, I can elect to sell those funds without tax/penalty (right?) and allocate them to a different set of securities still within the IRA?
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can I just roll over the entirety of the 401k into a Roth IRA?

If you do, you will need to pay income tax on the amount that was contributed "pre-tax", meaning the non-Roth amount that will be converted to a Roth deposit. Unless you have this cash on hand, it would be better to just roll into separate IRAs.

... the rollover amount is not subject to any IRA yearly contribution cap, nor would it be subject to income limits on a Roth IRA contribution ... , right?

Correct, although you can only do one rollover per year. However, if you make sure that this is a trustee-to-trustee transfer (meaning they wire or make the check out to the other trustee rather than you) then it doesn't count toward the once-a-year rule.

What happens to my specific funds?

Most likely you will only be able to transfer cash to the new funds, meaning that they will sell the funds in the 401(k) and you'll need to choose new funds in the IRAs after the cash is deposited. You can talk to the new broker and see if they can do a securities transfer, but since 401(k)s typically have different fund classes, it may not be possible.

Now that they will be rolled over, I can elect to sell those funds without tax/penalty (right?) and allocate them to a different set of securities still within the IRA?

Yes, once the funds get into the new IRA you can buy/sell without tax consequence. Tax is not levied until you withdraw cash, and it's always considered regular income - there's no concept of short/long-term capital gains within an IRA.

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What happens to my specific funds?

They are very likely (since you said funds, not individual stocks) to be cashed out and the cash is transfered.

Given how the market can have days of volatility, you might wish to do the transfer piecemeal. Say I have a 50/50 stock/cash mix. And $50K in each of the 2 accounts. I first make sure the allocation is Stock in the Roth, Cash in the Traditional. The traditional acct gets moved. A week later the cash shows up in the Traditional IRA. I set orders to buy the similar fund, e.g. a nonproprietary S&P index, in the IRA, and sell in Roth 401(k). Then move the Roth to your Roth IRA.

If the days in transit don't bother you or the money involved isn't high, then no need. For some, making a move with $100K (or $1M) and possibly seeing a lost 5% gain in a crazy week is something to avoid.

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  • 50% cash in an IRA would make my brain hurt. (My money is 50% bonds... The strategy would still work, since bonds are pretty non-volatile ATM.) – RonJohn Feb 4 at 17:24
  • Agreed, RonJohn. The issue for me is the risk of the move while the money is in limbo. By having the in-transit money as cash on both ends, the risk is minimized/eliminated. – JTP - Apologise to Monica Feb 4 at 17:30
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unclear to me if these are technically separate accounts

Most definitely, since you contribute to the Roth after you pay taxes, and you contribute to the Traditional before you pay taxes.

as far as I was functionally aware, I had one 401k account, which could have contributions split between Roth and traditional)

You probably got one statement, and the plan administrator made it look like one account, but "underneath" it's two accounts, since one "bucket" has been taxed, and the other has not been taxed.

(Never mix these two buckets. The IRS gets very irate!!!)

Since the 401k is half traditional and half Roth, does this mean I nany IRA yearly contribution cap, nor would it be subject to income limits on a Roth IRA contribution (ie normally, if I make over $137k, I can't contribute to a Roth IRA)eed a traditional IRA to receive the rollover of the former, and a Roth IRA to receive the rollover of the latter?

Correct.

Or can I jussend t roll over the entirety of the 401k into a Roth IRA?

You can, but that means having to pay taxes now on all that money!!

So... keep things simple and do the "half and half" rollover you described above.

Since this would be a rollover, not a contribution, the rollover amount is not subject to ..., right?

Right.

What happens to my specific funds?

  1. Open an account at the brokerage of your choice (Fidelity, Schwab, Vanguard listed alphabetically; there are hundreds more).
  2. From that brokerage's web site, initiate a Rollover.
  3. The 401(k) administrator will sell all the funds and wire the cash to your new brokerage.
  4. Then invest that cash as you please.

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