UnThreaded | Threaded | Whole Thread (10) | Ignore Thread Prev Thread | Next Thread
Author: baldguy13 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76397  
Subject: 401k distribution Date: 1/8/2004 11:22 AM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 0
Okay. I'm leaving my job in the next few weeks and I have a 401k with about $30,000 in it. I want to put it in an IRA, so I have more investment choices, but I'm not sure if I should pay the taxes and do the Roth or if I should go with a traditional IRA.

I'm 34 years old, plan on working for as long as I can (30+ years), and will probably be in a lower tax bracket in '04 than I was in '03 (or maybe '05)!

Also, I understand I need to put it in an IRA, then go Roth. This would avoid the 10% early withdrawal. How long does it have to be in an IRA before I can make that conversion?

BTW, any suggestions on who I should do the IRA through?

baldguy13
-clean shaven
Print the post Back To Top
Author: gogreengo Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38414 of 76397
Subject: Re: 401k distribution Date: 1/8/2004 12:23 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 0
You do need to put it into a traditional (or "rollover") IRA to start with. Then you can convert ALL or PART of it into a Roth pretty much right away. Depending on who you get your IRA from, you can indicate on your rollover/traditional IRA paperwork that you want all or part of it to be converted into a Roth. Or, you can just arrange to call them when you want to make the conversion.

I went with Fidelity for my 401k-into-an-IRA thing. They have discounts if you have a certain amount invested with them as a household. And there are lots of mutual funds, both from Fidelity and from "partners" like T-Rowe Price and Oakmark, to choose from. You can also choose to put individual stocks or bonds in your IRA, as well. Vanguard would be another excellent choice.

I chose to convert just half of my money into a Roth for 2003, and then will convert the rest in 2004, so I don't have to pay so much in taxes in either year. You could maybe spread yours out over several years, if you want.

Good luck!

Print the post Back To Top
Author: 2old4bs Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38424 of 76397
Subject: Re: 401k distribution Date: 1/8/2004 5:37 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 0
Basically I agree with everything gogreengo says, but I would put a little more emphasis on preferring the Roth route to the traditional route, even though the tax bite hurts over the short term. Also, keep in mind that the tax dollars have to come from somewhere else, not the IRA. With all that said, the Roth is definitely the better way to go and I only wish I qualified for one!!!!

2old


Print the post Back To Top
Author: baldguy13 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38437 of 76397
Subject: Re: 401k distribution Date: 1/9/2004 11:12 AM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 0
I much prefer the advantages of the Roth also.

So, when you convert a traditional IRA to a Roth IRA, the tax dollars have to come from another source? They can't come out of the traditional IRA? I no longer have the cash laying around to pay the taxes, especially if I'm going to be out of work (company screwed me big time).

baldguy13

Print the post Back To Top
Author: gogreengo Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38438 of 76397
Subject: Re: 401k distribution Date: 1/9/2004 11:55 AM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 0
The taxes don't HAVE to come from outside the IRA, but it's best if it does. If you use the money from the IRA to pay the taxes on the conversion, you're reducing the amount of money you have invested.

If you can't pay cash for the taxes, consider leaving the money in the traditional IRA until later in the year, or maybe until next year. There's no hurry to convert all or part of the money to a Roth. I guess the only thing would be that your money might grow in the next year, so you might owe more in taxes than you would if you converted it sooner. But it's still better to pay cash for the taxes, so waiting on the conversion from traditional to Roth might be your best bet.

Print the post Back To Top
Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38439 of 76397
Subject: Re: 401k distribution Date: 1/9/2004 1:24 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 1
baldguy13: {{{{"So, when you convert a traditional IRA to a Roth IRA, the tax dollars have to come from another source? They can't come out of the traditional IRA? I no longer have the cash laying around to pay the taxes, especially if I'm going to be out of work (company screwed me big time)."}}}}

gogreengo: "The taxes don't HAVE to come from outside the IRA, but it's best if it does. If you use the money from the IRA to pay the taxes on the conversion, you're reducing the amount of money you have invested."

gogreengo is correct that there is no legal requirement that the taxes come from outside the IRA that is being converted.

WHat gggo did point out the opportunity cost issue, gggo did not point out is that if you use funds from within the IRA to pay taxes on the conversion, that will be considered a withdrawal from the IRA, so you will owe income taxes on that amount (or some prorated portion if you have a tax basis in your IRA), and unless you are already retirement aged or can fit the withdrawal into one of the handful of exceptions, it will be an early withdrawalon which you also owe a 10% penalty.

You would have payed the income tax anyway upon conversion, but the 10% early withdrawal penalty on the dollars withdrawn from the IRA to pay the conversion tax is the other primary reason most people suggest using other funds (not inside the IRA) to pay the tax.

Regards, JAFO




Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Print the post Back To Top
Author: baldguy13 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38442 of 76397
Subject: Re: 401k distribution Date: 1/9/2004 3:43 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 0
I'm starting to confuse myself.

I understand that will reduce the investable dollar amount, but I thought I also heard that there was no early withdrawal penalty for closing a Roth (the caveat being you couldn't open another one for a year). If this is the case, you would have to pay early withdrawal penalties on the traditional IRA to open the Roth?

baldguy13
-thanking you guys for all your answers

Print the post Back To Top
Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38444 of 76397
Subject: Re: 401k distribution Date: 1/9/2004 4:59 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 0
baldguy13: "I'm starting to confuse myself."

It is easy to do.

"I understand that will reduce the investable dollar amount, but I thought I also heard that there was no early withdrawal penalty for closing a Roth (the caveat being you couldn't open another one for a year)."

No. In general, new contributions to a Roth IRA can be withdrawn at any time without tax effect. I am a little hazy at the moment for the rule WRT to conversions, but I vaguely recall that conversions need to be in the account for 5-years; PLEASE DO NOT TRUST MY MEMORY if this is an issue that matters to you. Earnings are an entirely different story.

"If this is the case, you would have to pay early withdrawal penalties on the traditional IRA to open the Roth?"

You need to keep the steps in the process clear.

Money in a 401-k can be withdrawn (taxable event), transferred to another 401-k plan that accepts transfers (non-taxable event), or rolled over or transferred to a traditional IRA (non-taxable event if handled correctly); the 401-k money cannot be transferred directly to a Roth IRA.

Once the money is in a traditional IRA it can, suject to MAGI limit and other applicable rules, be transferred to a Roth IRA (which is generally a taxable, except to the extent that you have basis in the IRA).

I will assume zero basis, for the balance of the discussion.

If you transfer the entire amount of the traditional IRA to the Roth IRA, it will all be taxable income and taxes will be due. As we discussed, the general recommendation is to pay those taxes with other funds.

If you transfer only a portion of the traditional IRA to a Roth IRA, such portion will be taxable income, and if you retain the balance of the traditinonal IRA to pay the taxes dues, that will be a distribution from the traditional IRA, which would be taxable, and unless you are of age or otherwise satisfy one of the alternatives, it would be an early withdrawal, subject to the 10% penalty for early withdrawal.

If you transfer the entire amount of the traditional IRA to the Roth IRA, it will all be taxable income, and if you later try to withdraw from the Roth IRA to pay those taxes (let us assume that you used a safe harbor to avoid estimated payments), that transfer is not a contribution that can be withdrawn tax free, and you will rn afoul of the rules related to withdrawing converted amounts (which I cannot recall in detail). IOW, contribution not = transferred/rollover amount!

If not of teh regular tax gurus clarify, you can ask on the Tax board, where the real tax pros hang-out (and I am clearly a kibitzer).

Regards, JAFO




Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Print the post Back To Top
Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38448 of 76397
Subject: Re: 401k distribution Date: 1/9/2004 7:19 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 1
I am a little hazy at the moment for the rule WRT to conversions, but I vaguely recall that conversions need to be in the account for 5-years;

That is correct.

Roth contributions can be withdrawn any time without penalty or tax.

Roth conversions can be withdrawn any time without tax. (Remember, you paid the tax when you converted.) The conversions must be in the account 5 years OR you must be 59 1/2 to avoid penalties. There are a couple of other exceptions, but you would probably rather not die or be disabled if you can avoid it.

Roth earnings are tax and penalty free if the account has been open 5 years AND you are 59 1/2. Again, death or disability can substitute for attaining 59 1/2.

Note that the 5 year test for earnings is not the same as the conversion 5 year test. Each conversion must wait 5 years for a penalty free withdrawal. But earnings in the account will be qualified once the account itself has been open for 5 years (and you meet the other part of the test, of course).

--Peter

Print the post Back To Top
Author: baldguy13 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38489 of 76397
Subject: Re: 401k distribution Date: 1/12/2004 4:59 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 0
Thank you Jafo and Pete. I think I finally undestand all the land mines. I appreciate your clarifactions.

baldguy13
-living on empty

Print the post Back To Top
UnThreaded | Threaded | Whole Thread (10) | Ignore Thread Prev Thread | Next Thread
Advertisement