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Q: I have a 401(k) with a company I retired from this year. Can I convert those funds to my Roth IRA? I don't want to convert all the funds because the tax bill would be too much. Can I convert just a part of the funds to my Roth IRA and then roll the rest of my 401(k) funds to my traditional IRA?
A: Yes, the tax law allows funds in a company retirement plan such as your 401(k) to be converted to your Roth IRA.
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Ask Ed Slott
Confused about IRAs, 401(k)s, Roths, taxes and more related to saving for retirement? Ed has the answers. Email your questions to IRAQuestions@aarp.org.
Assuming you are eligible to move the funds out of your 401(k), you should first ask the company if it will allow you to do two separate direct rollovers. One would be from the 401(k) to your traditional IRA. That rollover will be tax-free.
The other direct rollover would be for the remaining funds you want to convert to your Roth IRA. That direct rollover would be a taxable Roth conversion.
It's important that these be direct rollovers, and not 60-day (indirect) rollovers. A direct rollover means that your 401(k) funds will be transferred directly from your 401(k) to your traditional IRA and Roth IRA without you touching the funds in between. You should not get a check made out to you personally. If you do, the company will be required to withhold 20 percent for federal taxes, and you will only receive a check for the remaining 80 percent.