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I have a 401-k plan that due to a severance arrangement as a result of a corporate buyout I have been unable to contribute to for over a year. During that time unfortunately I have become totally disabled and am wrestling with whether to convert the 401-k plan(now totally invested in a S&P 500 index fund)to a self-directed IRA to which I can contribute annually. However in the process of conversion I will be unable to convert the after-tax portion of the plan (about 5% of the total) due to government regulations. I will not receive disability benefits for another year and have 15 years until retirement age.

What is the best way to go here? Continue with the current plan without being able to contribute and simply contribute the $2000 per year (my wife is gainfully employed but has no 401-k plan) to a separate simple IRA? Or if so, would a Roth IRA be more advantageous? Thanks
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<< What is the best way to go here? Continue with the current plan without being able to contribute and simply contribute the $2000 per year (my wife is gainfully employed but has no 401-k plan) to a separate simple IRA? Or if so, would a Roth IRA be more advantageous? >>

I'll leave advice to others, but I want to make sure you understand the law.

You do not have to roll the 401(k) into an IRA in order to make IRA contributions. The two are totally separate. Even if you do roll the 401(k) into an IRA, you are limited to (nonrollover) annual contributions of $2,000.

If you and your wife file a joint return and you have $4,000 in earnings between you in a year, each of you can contribute $2,000 to an IRA for that year.

If you meet the AGI limits for Roth IRA contributions and can afford to forego any allwable deduction for traditional IRA contributions, it seems to me that the Roth is the way to go. As long as you leave the money in place to satisfy the rules, the earnings will never be taxed.

You can get more information in All About IRAs, accessible through the Quick Find dropdown menu in the upper-right corner of this screen.

TMF ExRO
Phil Marti
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Not knowing all the details of your situation, I won't try to give specific advice. You should see a good financial planner for that. I can shed a little light on a couple important issues.

If you close the 401-K, your former employer will send you a check for your after-tax contributions. You owe no taxes on this as you already paid them, so just invest it in a taxable account or live off it for awhile.

You say you have not been participating in this plan for a year. Be sure they will still let you get out. When I was re-organized into unemployment, my former employer's plan offered two alternatives: withdraw all funds from their 401-K within 60 days or leave it there, with no withdrawals permitted, until I was 65. Get the idea that they didn't want to be bothered by ex-employees? Every plan is different, but if there is anything like this in yours, get out immediately. You need the flexibility that an IRA offers.

Speaking of flexibility, the variety of investments for an IRA compared to most 401-K's makes conversion pretty attractive.

Good luck!
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If you close the 401-K, your former employer will send you a check for your after-tax contributions. You owe no taxes on this as you already paid them.

Taxes have only been paid on the original contributions, not the gain. You would still owe for the gain, correct?
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Greetings, Marciawayne, and welcome. You asked:

<<Taxes have only been paid on the original contributions, not the gain. You would still owe for the gain, correct?>>

That's correct. The gains would have been included in whatever money was transferred to the IRA. They would then be taxed as distributions come out of the IRA. The after-tax money cannot be transferred to an IRA. That's why it comes to the employee as a separate check on which no income tax must be paid.

Regards..Pixy
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