I received this really great question about 401(k)’s and Roth IRA’s: “So my mom just surprised me and said that I have a very small chunk of money in a ROTH IRA account with Fidelity that she opened for me over 5 years ago. She said it’s less than $2500 (which I think I get fee taken out because of it). So I would like to transfer the money from my 401(k) to this account. I no longer work for the company and they told me I should roll it over. So here are my questions.

1. Can I roll over my entire or partial amt of my 401K into this Roth IRA?

2. Will my 401K penalize me a fee for this rollover other than the tax I will have to pay for going into a Roth fund?

3. I understand the rules that since my Roth IRA account is over 5 years old and I can take what I have in there out with no penalty and tax free. So with this in mind, does this apply also if I were to put in my new rolled over money or do I have to wait to withdraw another 5 year time frame on this new deposit of money?”

This is a tough question, and it will force me to put on my thinking cap. About three months ago I went through the same scenario. I rolled my entire 401(k) balance into two different Roth IRAs with no problem. The one difference that I see here is that I actually left the company I worked for and it sounds like you are staying. Most of the time companies do not let you take your 401(k) prior to leaving the business unless you are in a huge financial problem. I do not recommend taking any money out of your 401(k) because of the taxes and penalties. Check with your Human Resource department and ask them.

Secondly, if you were to leave the company and transfer your 401(k) balance to a Roth there is something you must do first. You have to open up a Traditional IRA before you make the roll-over. Your 401(k) balance is pre-tax money just like a Traditional so you have to open that first. There shouldn’t be any fees tied with the transfer, but again check with your HR department. After you transfer your funds you can later move it into a Roth IRA. At this point you will have to pay regular taxes on the amount of money you are transferring over. Eventually (In the year 2010), they will be allowing straight roll-overs from your 401(k) to a Roth. So if you have a large 401(k) balance you might want to do it in increments so that you won’t get pushed up to a higher tax bracket.

Your last question is partially true. You can take out the contributions you made to your Roth IRA after five years (again HIGHLY do not recommend this), but the interest that has accrued in the Roth will be taxed and penalized. If you do not like where your Roth IRA is housed then transfer it to another brokerage or mutual fund company.

A rule of thumb that I think young investors should follow is - If you have less than $25,000.00, invest in a good mutual fund. If you have over $25,000.00 you can consider investing in single stocks and ETFs. Remember that diversification is still key, and always do your homework before you invest in single stocks. Unless you are Warren Buffet consider staying in a mutual fund.