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I suggest you consult a tax professional - there are a fair number of rules - like limits on total contributions and very specific procedures if you decide to undo a contribution.

The OP was asking about conversions, not contributions. There are no limits on conversions, other than ensuring that you are able to pay the taxes that are owed due to the conversion.

And you can no longer reverse (aka recharacterize) a conversion, like can be done with contributions.

That said, I don't really think it's necessary to consult a tax professional.

AJ
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I trust you are aware the conversion is a taxable event and you may need to pay the taxes in the quarter of the conversion to avoid IRS penalties.
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I trust you are aware the conversion is a taxable event and you may need to pay the taxes in the quarter of the conversion to avoid IRS penalties.

Yes, I'm expecting to have two years of relatively low income and I was thinking of doing conversions then, when the taxes would a bit lighter.

But, another question now occurs to me: when I do a conversion, do I have to sell my holdings in the 401(k) and then just use the proceeds for the conversion -- or can I convert specific holdings just as they are?

culcha
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Choose the custodian for the Roth you want and usually they will walk you through the details. Usually they will want to roll the 401k into a rollover IRA and then do a Roth conversion on the IRA.

The rollover is free and unlimited provided your 401k allows the rollover. If you are no longer with the company, the rollover is usually permitted, sometimes even encouraged. In service rollovers are sometimes allowed but rare.

The conversion to a Roth is a taxable event. If its a large account doing partial conversions to keep out of higher income tax brackets can be a good idea. The only limit I have run into only one conversion allowed per year.

For irs info, see IRS Publication 590A p 44, available on line: https://www.irs.gov/pub/irs-pdf/p590a.pdf

They remind you that direct trustee to trustee transfer is preferred. Otherwise, they take withholding which you must then replace to avoid penalty on that distribution.
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do I have to sell my holdings in the 401(k)

Ask your custodian for the Roth. If you own shares of stock or mutual funds in your 401k, in kind transfer without sale are possible. But sometimes mutual fund shares in a 401k are derivatives rather than shares. Then sale may be necessary.

But if you sell and repurchase, both are tax free. Commissions are your only concern.
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First off, I assume this can be done.

Yes, it is legally possible to do a direct from pre-tax 401(k) to Roth IRA rollover. IRA custodians may want you to roll the money into a Traditional IRA first, and then do the conversion into the Roth IRA. But that's not required by law any longer.

Second, I'm wondering about the rules for this: are there $-amount or %-amount limits?

No limits on either $ or % - as long as you will have the money to pay the taxes that are due. If you aren't otherwise meeting a safe harbor, you will need to pay estimated taxes. If you are otherwise meeting a safe harbor, you can just pay the taxes by the following April 15.

Other rules that I should know?

If you don't already have a Roth IRA established in your name and you establish one to accept this conversion, the distributions from the Roth IRA will not be considered 'qualified' for 5 tax years, since a qualified distribution requires that the Roth account be at least 5 tax years old, and that you meet another condition, like being over 59 1/2

Helpful IRS booklets?

IRS Pubs 590-A https://www.irs.gov/pub/irs-pdf/p590a.pdf and 590-B https://www.irs.gov/pub/irs-pdf/p590b.pdf

AJ
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when I do a conversion, do I have to sell my holdings in the 401(k) and then just use the proceeds for the conversion -- or can I convert specific holdings just as they are?

You can convert specific holdings, if they are actual tradable securities, and the IRA custodian will accept them. The problem is, many 401(k)s have holding that are set up as 'investment trusts', which mimic mutual funds and/or ETFs, rather than the actual mutual fund or ETF itself.

Also, if you hold company stock in your 401(k) account, you should explore the Net Unrealized Appreciation (NUA) rules before you decide to convert the company stock.

AJ
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Here is good place to start

https://www.irs.gov/retirement-plans/retirement-plans-faqs-r...

I suggest you consult a tax professional - there are a fair number of rules - like limits on total contributions and very specific procedures if you decide to undo a contribution.
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No. of Recommendations: 4
I suggest you consult a tax professional - there are a fair number of rules - like limits on total contributions and very specific procedures if you decide to undo a contribution.

The OP was asking about conversions, not contributions. There are no limits on conversions, other than ensuring that you are able to pay the taxes that are owed due to the conversion.

And you can no longer reverse (aka recharacterize) a conversion, like can be done with contributions.

That said, I don't really think it's necessary to consult a tax professional.

AJ
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