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Tax angles on conversion from 401(k)

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in Small Business Tax

Q. My son was just downsized from his job. If he rolls over his 401(k) into a Roth IRA, is it taxable? S.M.S., Houston

A. Yes. When you transfer funds from a qualified plan like a 401(k) into a Roth IRA, the transfer is treated as a taxable conversion contribution into the Roth account. For instance, if you arrange a direct trustee-to-trustee transfer or you complete the rollover within 60 days, you will still owe tax in the year of the transfer or rollover. Note, however, that this technique can be used regardless of your son’s income. (Certain high-income taxpayers can’t make annual Roth IRA contributions, but even billionaires qualify for Roth conversion contributions.)

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