Will rolling over my 401K into a traditional IRA have any tax consequences if modified adjusted gross income (MAGI) is above the IRS income limits?

Question

I currently have a 401K account from my employer. I have had this account for the past 4 years. I wish to have better control over my investments made in this retirement account, so I am considering rolling over my 401K into a traditional IRA account.

However, I have read that any contributions to an IRA account are tax deductible only if the modified adjusted gross income (MAGI) is less than IRS income caps. So if my current MAGI is higher than the IRS limit, will I get taxed on the money when I roll it over from my current 401K to a traditional IRA account?

Thank you.

Answer 1

If it's your current employer (which seems to be, given that you wrote, "currently ... my employer), you can't.

It's "stuck" in that 401(k) until you don't work there anymore. (Some plans allow you to transfer -- not borrow! -- money out while still employed, but that's rare.)

The only and partial solution is to reduce your 401(k) contribs, and instead contribute to an IRA, but that doesn't seem it would work in your situation, because "MAGI is above the IRS income limits".

As to "will I get taxed on the money when I roll it over from my current 401K to a traditional IRA account" when you no longer work there: NO, because...

Rollovers are not distributions.

That's why they're called rollovers: you're just rolling the money from one tax-advantaged account to another.

Answer 2

So I am considering rolling over my 401K into a traditional IRA account.

We will assume that you can do this. Not all employers allow current employees to do this.

I currently have a 401K account from my employer.

Not all value in the 401(k) is the same. It depends on the source of those funds.

will I get taxed on the money when I roll it over from my current 401K to a traditional IRA account?

Money that you contributed to the Roth portion of your 401(k) can be rolled into a Roth IRA with no tax implications. This money was already taxed before you contributed it. The growth in value will also be transferred into the Roth IRA without any tax impact. Your current income level doesn't matter.

Money that you put into the Traditional pre-tax portion of the 401(k) can be rolled over into a traditional IRA without any tax being paid now. It doesn't matter if you are single or married. It doesn't matter how much your income is. This also applies to the growth in value.

Money that your company contributed is considered pre-tax money. This includes company match, an annual profit sharing contribution, or any thing else. This money and its growth has to end up in a traditional IRA or there will be tax due now.

Some companies allow post tax contributions. That money has been taxed but it isn't a Roth. In this case a rollover will be split between the Roth IRA and a traditional IRA. Your contribution to the Roth, the growth to a traditional.

If the rules are followed then there will be no immediate tax impact. The company running your Traditional and/or Roth IRA can help with the roller paperwork. There is no limit to the amount being rolled over. It doesn't matter what your current income level is.