03 Mar How do I transfer this 401(k) to an IRA without a tax impact?

Q. I changed jobs back in August 2019. While working there I was fully vested into their 401(k). The majority was in a Roth 401(k) and a smaller amount was in a traditional 401(k). There was also an employer match. I would like to transfer it to an IRA with no tax impact. I assume I have to transfer the traditional piece to a standard IRA and the Roth 401(k) to a Roth IRA. Ideally I would like to move it all to a Roth IRA but I assume that’s not possible without tax impact. And how do I handle the employer match funds?
— Investor

A. You certainly can roll over your 401(k) to an IRA, but you’re correct that you need to be aware of tax implications of a wrong move.

Most investors will roll the traditional portion of a 401(k) to a traditional rollover IRA and the Roth portion to a Roth IRA, said Bill Connington of Connington Wealth Management in Paramus.

If you want to move the whole thing to a Roth IRA, you’d be looking at a Roth conversion for the traditional portion of the 401(k).

The amount transferred will be taxed at your ordinary income rate, just like salary, Connington said.

“The upside is that by converting now and paying the taxes, you will not pay taxes on the distributions in retirement,” he said.

He said you can pay the tax out of the 401(k) or pay with cash you have on hand.

“If you pay with cash on hand, more would go into the Roth IRA to grow,” he said. “Remember to pay attention to the five-year rule, which is that the Roth plan has to be held for at least five years.”

As for the employer match funds, unless there was a vesting schedule as part of the plan, they should rollover with no problem, he said.

Consider speaking to your tax preparer to be sure you make the correct moves.

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This story was originally published on March 3, 2021.

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