We know saving for retirement is a top priority for many investors. No matter where you are in the planning process, you may have questions. We can help. Check out the questions we've already answered, or if you're a Fidelity customer, submit your own. We'll post replies to selected questions on a weekly basis.
Can anyone convert to a Roth IRA?
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Thanks for your question regarding an early distribution from your 401(k). Typically, the taxes and potential penalty related to an early withdrawal from a retirement account, like a 401(k), can be handled separately. Generally, the withdrawal will be subject to some mandatory federal, and, depending on the state where you reside, some mandatory state withholding at the time of the withdrawal. The potential 10% penalty can be paid up to your tax filing deadline for the year in which the early withdrawal took place.
You don’t state the reason for making a withdrawal from your 401(k) but I wanted to let you know that in some instances, the 10% penalty is waived. Those exceptions are listed on this page from Fidelity.com: https://www.fidelity.com/taxes/tax-...
Another option you may want to consider is taking a loan from your 401(k). Taxes and penalties are not assessed for a loan, and you have five years to pay it back, with interest that is also added to your account. There are pros and cons, however, to taking a 401(k) loan and those are discussed in this Fidelity Viewpoints® article: https://www.fidelity.com/viewpoints...
I hope this information is helpful.
Also linked on the above page is our Roth IRA Conversion Checklist which can help lead you through the process of converting if you decide its right for you.
I hope this information is helpful to you.
For your own purposes, I suggest that you record the amount contributed in the event that you ever want to take a distribution before age 59½. Contributions are not subject to tax or penalty on withdrawal, but earnings can be.
A Roth conversion refers to moving funds out of a pre-tax IRA or 401(k) and depositing them into a Roth IRA. There aren’t penalties applied to this type of transaction, but it is taxable. When funds are contributed to a Roth IRA, they’re deposited after-tax, potentially grow tax-free and, provided distributions are qualified, those are also tax-free.
This differs from funds deposited in a Traditional IRA or 401(k) in that funds in those types of accounts are typically deposited pre-tax, potentially grow tax-deferred and are then taxed at your ordinary income rate when withdrawn in retirement.
If you decided to roll your old 401(k) to your Roth IRA, the rollover amount would be taxed at your ordinary income rate and you’d be liable to pay that amount to the IRS when you file your return for this year.
If you decide not to move your retirement savings from your old 401(k) to a Roth IRA, the Traditional IRA you mentioned can receive them, penalty and tax-free. Here’s a page on Fidelity.com that further discusses details around Roth conversions and whether one may be right for you. https://www.fidelity.com/taxes/tax-...
I hope this information is helpful for you. Thank you again for your question.
He can use our IRA Contribution Calculator at https://scs.fidelity.com/products/m... to determine his eligibility for a Roth and how much of his Traditional IRA contribution might be tax-deductible. I hope this information is helpful.
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