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April 30, 2022
Question

I am in the process of rolling over my 401k to a Roth IRA. It looks like I have a pre tax and roth amount. Do I just need to pay tax on the pre-tax amount? Is it 20%

  • April 30, 2022
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Employee
April 30, 2022

Yes the pre-tax portion of the rollover from a traditional 401(k) account to a Roth IRA is taxable.   The taxable amount is taxed as ordinary income, so the tax liability from this rollover is not established until you prepare your tax return.  If the rollover is done as a direct rollover (reported on a Form 1099-R with code G in box 7, the taxable pre-tax amount in box 2a, the nontaxable after-tax amount in box 5 and the total amount in box 1), there is no mandatory tax withholding, but you may still want to make an estimated tax payment to avoid a tax underpayment penalty when you file your tax return.  The law requires the employer to offer the option to do a direct rollover.

 

If the rollover is done indirectly where the distribution is paid to you and you subsequently roll amounts to either a traditional IRA or a Roth IRA, there is 20% mandatory tax withholding on the taxable portion and you would have to substitute other funds to be able to roll over the portion withheld for taxes.  The 20% figure is in no way related to your actual tax liability resulting from this rollover.  It mainly to help you avoid a tax underpayment penalty, but failing to roll over the entire gross amount of the distribution reduces your retirement savings and could result in an early-distribution penalty.