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What is the process for rolling a 401(k) over to a Roth IRA and what occurs as far as taxes owed?

The particulars of the process depend on what the 401(k) administrator and the IRA trustee require. But in general, when you do the paperwork you need to indicate that you want to do a combination rollover and conversion from a 401(k) to a Roth IRA.

Nothing will be withheld for taxes from the distribution if you do not request it to be. This is good, because you don't want to withhold anything from the distribution. If you do have some of the distribution withheld, you will owe taxes plus a 10% penalty on the withholding, assuming you are under 59 1/2.

If you do the rollover/conversion in 2009, in early 2010, you will get a 1099 that shows the amount converted as a distribution from your 401(k). When you fill out your tax forms, you will need to indicate that the amount distributed was converted into the Roth IRA and you will owe taxes, at your marginal rate, on the amount converted. If the conversion amount drives you into a higher marginal bracket, you will end up paying taxes at the higher marginal rate.

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