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Author: grnbrsea Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76418  
Subject: 401K Rollover Date: 11/2/1998 3:32 PM
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I have changed jobs and have the opportunity to do something with my old 401K. I hear Roth, Self Directed, etc. Please help me understand the best way to go given that I have many years to let the money grow.
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Author: peppermintpatty Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6377 of 76418
Subject: Re: 401K Rollover Date: 11/2/1998 3:40 PM
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Dear grnbrsea: With 401k funds you must first move them to an IRA before you can convert to a Roth (if that's what you eventually wish to do). Shop for the IRA provider you want - mutual fund, self-directed stock fund, etc. and move on from there. Interview the provider to be sure they'll provide the services you require! Good luck! PP

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6381 of 76418
Subject: Re: 401K Rollover Date: 11/2/1998 4:58 PM
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Greetings, Grnbrsea, and welcome. You wrote:

I have changed jobs and have the opportunity to do something with my old 401K. I hear Roth, Self Directed, etc. Please help me understand the best way to go given that I have many years to let the money grow.

Around Fooldom we leave specific investment choices up to you based on your own research and your own comfort level. Given your age and given this is money designated for retirement that will occur many years from now, most of us would say you should give very strong consideration to investing this money in stocks. That can be done through individual stock selection or through a mutual fund. And if the latter, we will invariably stipulate that the fund should be an index fund like the Vanguard 500. We say that for two reasons. First, history shows that over long periods of time (i.e., 10-year and 20-year periods) stocks almost always beat other options such as bonds and money markets. Second, when it comes to stock mutual funds, the Vanguard 500 beats 70% to 85% of managed stock funds year in and year out, and that holds true over the long term. Thus, it makes a no-brainer choice for mutual fund investing.

As to your 401k money, be aware that you cannot put it into a Roth IRA. It must first go to a traditional IRA. Once there, it can then be transferred to a Roth IRA. If you do that, you must pay taxes on the 401k money. And how you pay those taxes largely determines whether you are better off putting it in a Roth or leaving it in a traditional IRA. See my analysis on this issue at:

http://boards.fool.com/Registered/Message.asp?id=1040013000441002&sort=postdate

That will help you decide. In the meantime, ensure you ask for a direct transfer of the 401k money from your plan to a traditional IRA at a broker/fund of your choice. That ensures you will avoid any and all tax hassles when the money comes out of the 401k plan. Don't worry. Both the broker/fund and your plan know how to do this and will guide you through the necessary hoops to get it done provided you tell them that's what you wish to do.

Regards…..Pixy


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Author: MrGorsky One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6398 of 76418
Subject: Re: 401K Rollover Date: 11/3/1998 4:04 PM
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There is alot of talk about how your tax rate effects the "Roth or not to Roth" decision. Could someone please give the %15 - %28 cutoff for a single person.

THanks
Mr Gorsky

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6403 of 76418
Subject: Re: 401K Rollover Date: 11/3/1998 7:37 PM
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MrGorsky asks:

<<There is alot of talk about how your tax rate effects the "Roth or not to Roth" decision. Could someone please give the %15 - %28 cutoff for a single person.>>

You're in the 28% marginal tax bracket in 1998 when as a single person your taxable income is over $25,350 and doesn't exceed $61,400. The brackets are adjusted upward each year by roughly the inflation rate.

Regards….Pixy


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Author: WeezFool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6471 of 76418
Subject: Re: 401K Rollover Date: 11/6/1998 4:18 PM
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Hello Pixy et al!,

Trying to decide on what to do with a 401(k) still at former employer since 1997. I've recently gotten Foolish and want more control over my funds. (Not to mention that this 401(k) went from ~$45k to less than ~30 in the last several months!)

I file jointly and with my wife we earn about $65k. I am a Programmer/Analyst, so security and earnings potential are pretty good. (Whatever that is nowadays! =) ) No kids and not seeing any in future. (guess that makes us DINKs?!) We are 29 years old, so like the original post in this thread, we have a good 30+ years to invest. I read your article mentioned in an earlier reply and I DO have the [mutual] funds (which I Foolishly want to get out of anyway!) to pay the taxes over the 4 years for Roth conversion. Seems better 1) to go all the way to a Roth (vs. stay in an IRA) b/c it's L-T (>10 years), and 2) to do it in 1998 to break up the taxes -- and hence keep earning on that which don't yet have to pay.

Also, having trouble understanding what my tax bracket is now and at retirement. I think we are in the 28% bracket, but believe I actually pay more like 30-31%, as I heard we pay 28% for the first 42K or so and then on the remainder ($65k-42=$23k) is at ?32% ? Make sense? How can I know/predict what my bracket/amount will be when retire (esp. in regards to its impact in going with a Roth), if not working then (>30 yrs) and not sure how much will be taking out from investments and if will be working. We are pretty good at living within or below our means. We now live in Florida, so no state tax! (Plan on staying here, as from the Colder Tundra (WI) originally!)

Understand have to go to an IRA first, then Roth. Just opened up an account at Waterhouse. (BTW, have made ~14% on my RP4 investments in less than 2 months!) You think it's not that important if you want primarily stocks and you pay $12/trade, vs. say only $7 if there are going to be ~$5000 in each trade?

Lots of questions, but is all pretty confusing. Any feedback would be Foolishly appreciated. Am trying to get this all decided ASAP as 1998 is soon coming to a close! Thanks one and All.

"I may be a Fool, but at least I'm a...
WeezFool!"

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Author: BillEuclid Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6495 of 76418
Subject: Re: 401K Rollover Date: 11/8/1998 4:45 AM
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You are currently in the 28% tax bracket. The first $12,000 or so that you and your wife earn is not taxed at all (covered by the standard deduction and your two exemptions). The next $42,000 or so is taxed at 15%. So only what you make in excess of $54,000 is taxed at 28%.

You have to make SOME kind of projection as to what your tax rate will be at retirement, otherwise you cannot make decisions; assuming that rates will continue as they are now is reasonable.

If you are not sure, consider this "insurance" approach: If you make the decision based on the assumption that you will have a significantly lower income in retirement than you do now, then one of two things will happen at retirement: (1) your income IS lower, in which case you made the right choice, or (2) your income is the same or higher, in which case the wrong choice cannot hurt much because you are so well off.

For that reason, I would think that most people who have a long way to go to retirement should not convert an ordinary IRA to a Roth IRA. If they drop to the 15% tax range, they come out ahead, and if they stay in the 28% tax range, they have lots more money than they feared anyway.

Bill


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Author: DHatch Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6499 of 76418
Subject: Re: 401K Rollover Date: 11/8/1998 3:34 PM
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<<For that reason, I would think that most people who have a long way to go to retirement should not convert an ordinary IRA to a Roth IRA. If they drop to the 15% tax range, they come out ahead, and if they stay in the 28% tax range, they have lots more money than they feared anyway. Bill>>

Dear Bill:

Have you considered that: while a traditional IRA requires one to withdraw at a certain age and face the tax consequences thereof, for better or worse, the Roth IRA does not require one to make mandatory withdrawals at any time so that the tax-free compounding may continue as long as one wishes and the Roth IRA which has been in existance for at least five years will permit one over a certain age to withdraw whatever one desires or needs free of any income tax consequences whatsoever and even designate beneficiaries to benefit from whatever might remain of the residue of the Roth IRA?

Foolishly, DHatch :}




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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6523 of 76418
Subject: Re: 401K Rollover Date: 11/9/1998 3:03 PM
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Greetings, WeezFool, and welcome. You wrote:

<<Trying to decide on what to do with a 401(k) still at former employer since 1997. I've recently gotten Foolish and want more control over my funds. (Not to mention that this 401(k) went from ~$45k to less than ~30 in the last several months!)

I file jointly and with my wife we earn about $65k. I am a Programmer/Analyst, so security and earnings potential are pretty good. (Whatever that is nowadays! =) ) No kids and not seeing any in future. (guess that makes us DINKs?!) We are 29 years old, so like the original post in this thread, we have a good 30+ years to invest. I read your article mentioned in an earlier reply and I DO have the [mutual] funds (which I Foolishly want to get out of anyway!) to pay the taxes over the 4 years for Roth conversion. Seems better 1) to go all the way to a Roth (vs. stay in an IRA) b/c it's L-T (>10 years), and 2) to do it in 1998 to break up the taxes -- and hence keep earning on that which don't yet have to pay.>>


You have the resources to pay the taxes without touching the conversion money, you have longer than 10 years before it will be touched, and you think you can get a better return than what you're now getting in the mutual funds. With that as a given, then a conversion in your case probably is a good move.

<<Also, having trouble understanding what my tax bracket is now and at retirement. I think we are in the 28% bracket, but believe I actually pay more like 30-31%, as I heard we pay 28% for the first 42K or so and then on the remainder ($65k-42=$23k) is at ?32% ? Make sense? How can I know/predict what my bracket/amount will be when retire (esp. in regards to its impact in going with a Roth), if not working then (>30 yrs) and not sure how much will be taking out from investments and if will be working. We are pretty good at living within or below our means. We now live in Florida, so no state tax! (Plan on staying here, as from the Colder Tundra (WI) originally!)>>

That's the big question. None of us can predict future tax rates, so all we can do is assume the brackets will be the same as they are today. With that assumption, we can adjust those brackets for inflation and see where our projected taxable income falls for those brackets. That means you have to make some kind of assumption regarding the income you intend to withdraw each year after you retire. Only you can make that determination.

<<Understand have to go to an IRA first, then Roth. Just opened up an account at Waterhouse. (BTW, have made ~14% on my RP4 investments in less than 2 months!) You think it's not that important if you want primarily stocks and you pay $12/trade, vs. say only $7 if there are going to be ~$5000 in each trade?>>

Yep, the 401k money must first be in a traditional IRA before it can be converted to a Roth IRA. Trading costs are always important, and the lower the better. If I'm doing all the research and analysis and all the broker is doing is executing trades at my direction, then I certainly wouldn't want to pay $12 a trade when I could do so at $7 unless the higher-cost broker had some amenities important to me that were not available at the lower-cost broker.

Regards….Pixy


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Author: BillEuclid Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6575 of 76418
Subject: Re: 401K Rollover Date: 11/11/1998 1:39 AM
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Hi, DHatch!

Yes, I considered those factors when I said, "For that reason, I would think that most people who have a long way to go to retirement should not convert an ordinary IRA to a Roth IRA. If they drop to the 15% tax range, they come out ahead, and if they stay in the 28% tax range, they have lots more money than they feared anyway."

Specifcally, I think that a married couple under age 50 ("long way to go") with income in the lower 28% tax range ($55,000 to $85,000) and less than say $60,000 in IRAs and 4xx plans would be better off to postpone conversion to a Roth IRA, unless they are quite sure that they will never drop down into the 15% tax range (under $55,000 in inflation-adjusted dollars) even well after retirement.

I would guess that the majority of such people will find, when they get to around age 60, that they can expect no more than around $70,000 of annual income. This means that they will be drawing most of their IRA money out at the 15% tax rate, which will be much more advantageous than having converted it at the 28% rate earlier in life and spending it tax-free during retirement.

If they find that they will have more income than that, they can convert the excess money from traditional IRA to Roth IRA between the ages of 60 and 66 and still get exactly the same benefits of a conversion 20 years earlier, except one: they will lose a moderate amount to taxes on the taxable money they had 20 years earlier that they could have used to pay the conversion taxes.

I'm not saying this is peanuts, I'm just saying that, if you do not know right now whether you will have closer to $70,000 or $50,000 annual income when you retire, then it is an insurance play to make the decision that will (a) cost you a little if you manage to retire on over $70,000 but (b) save you a lot if you can't manage over $50,000 in retirement.

Note that there is no harm in being forced to withdraw money from a traditional IRA between ages 70.5 and 90 if you would have had to withdraw the equivalent post-tax amount anyway from a Roth IRA during those years, just to pay living expenses.

And you can designate beneficiaries for a traditional IRA the same as for a Roth IRA; in fact, your beneficiaries come out a lot better with a traditional IRA if they are at a lower tax rate than you are (and in particular, if you leave the IRA to charity).

Paying 28% now to convert to a Roth and withdraw 20 or even 30 years later tax-free is WORSE than waiting the 20 or 30 years and then paying taxes at the 15% rate.

Example: I personally have calculated I will need to convert between 20 and 40% of my IRA and 4xx plan to a Roth IRA, depending on how things go in the next 10 years or so. So I will convert 20% as soon as possible (since I am SURE I won't ever be able to convert THAT at the 15% tax rate) and wait 5 to 10 years on the rest.

Bill





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Author: WeezFool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7116 of 76418
Subject: Re: 401K Rollover Date: 12/9/1998 8:56 AM
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Greetings again to you, Pixy!

I really learned a lot from your article and the Fairmark site mentioned in other messages. Thank you very much for all the information and the reply.

I have decided to go with a full conversion to a Roth.
I have already transferred my 401k funds directly to an IRA account at Brown & Co. (BTW, as you probably know, they have $5 market trades. Trades have gone very smoothly on-line, taking only seconds and I have received confirmations promptly. I didn't need any extras and am in this -- obviously -- for the long haul, so decided to go with them... a little info back for others!)

My one remaining question:
with Brown, they have a $25 fee for the IRA to to Roth conversion since I have had the IRA less than 9 months with them. I am wondering how to best pay this. Saw another Fool insisting on a separate check so that funds would not come out of the IRA. How could this impact my tax filing? What are your thoughts?

Best Regards,
-WeezFool

P.S. Again, I really appreciate having all these Foolish resources from you and the entire Foolish community. Great site!

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Author: WeezFool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7117 of 76418
Subject: Re: 401K Rollover Date: 12/9/1998 9:14 AM
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Hi Bill,

Wanted to thank you for getting me to really think about the Roth conversion, and for replying to my tax bracket questions.

Even if I assume that I'd be in the 15% bracket at retirement, everything I've seen seems to point to the Roth being the better alternative, as I have more (much more) than 10 years to go until retirement and can pay with non-IRA funds. I site Pixy's article and the Fairmark site, among others.

Also, the Roth seems much more flexible and I can take the taxes over 4 yrs if I do it now. Not to mention that I recently lost 15k ("only" worth 30k now) in my 401k, so I'd have less to pay now anyway!
Then the funds can keep growing tax-free during retirement, yet are available if needed as soon as 59.5 yrs (if not sooner for special cases).

Overall, I believe I'd have more money later, and access to it would be more flexible with the Roth. I still am maxing my new 401k, and am thinking of keeping that one in a 401k/regular IRA.

Thanks again for your insight!
Best Regards,
-WeezFool

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7131 of 76418
Subject: Re: 401K Rollover Date: 12/9/1998 2:01 PM
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WeezFool asks:

<<My one remaining question:
with Brown, they have a $25 fee for the IRA to to Roth conversion since I have had the IRA less than 9 months with them. I am wondering how to best pay this. Saw another Fool insisting on a separate check so that funds would not come out of the IRA. How could this impact my tax filing? What are your thoughts?>>


Why take the $25 fee from the IRA unless you have to? Pay it separately so the money can stay within the IRA and continue to compound. Payment will have no impact on your tax filing other than to reduce your taxable income by $25 because the conversion income will be that much less if you pay the fee within the IRA. Hardly seems worth it to me.

Regards….Pixy



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Author: WeezFool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7133 of 76418
Subject: Re: 401K Rollover Date: 12/9/1998 2:27 PM
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Pixy,
My thoughts as well...
As always, thanks for the insight.

I planned on insisting they take a check.

wise Foolin'!
-WeezFool ;D)

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Author: Wavelength One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7216 of 76418
Subject: Re: 401K Rollover Date: 12/11/1998 9:43 PM
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TMFPixy:

>> Why take the $25 fee from the IRA unless you have to? Pay it separately so the money can stay within the IRA and continue to compound. Payment will have no impact on your tax filing other than to reduce your taxable income by $25 because the conversion income will be that much less if you pay the fee within the IRA. Hardly seems worth it to me.>>

NOW you tell me! :)

I set up non-deductable IRAs last Dec. for myself and my wife so that I could get a head start on our Roth IRAs, and in Jan. of this year converted them to Roths. I was unaware that it was possible to pay the conversion fees (actually a $25 termination fee for each of the traditional IRAs) OUTSIDE of the IRA. Since the conversion was made fairly quickly, I only have a few dollars of money earned within the accounts before the conversions. From what you've said above, it looks like these fees will offset the measly few bucks that we earned in these accounts, and so I will not need to report this money as gains. Is this true? If so, can I use the additional difference between the earned money and the fees paid to reduce my taxes?

ie, I guess I'm asking what happens if you report a net LOSS, and not gain, when making a Traditional/Roth IRA conversion. Is the loss (the difference between your non-deductable contributions and the net value after conversion) subtracted from your income, is it considered a capital loss (short term?) and thus can only offset capital gains if you're already above the $3000 capital loss threshold, or what? I hope not too many people will encounter this situation after the great bull market of the past few years, but then again there are lots of bad investments out there, and this situation must have been anticipated.

Wavelength

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7218 of 76418
Subject: Re: 401K Rollover Date: 12/12/1998 10:49 AM
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Greetings, Wavelength, and welcome. You asked:

<<I set up non-deductable IRAs last Dec. for myself and my wife so that I could get a head start on our Roth IRAs, and in Jan. of this year converted them to Roths. I was unaware that it was possible to pay the conversion fees (actually a $25 termination fee for each of the traditional IRAs) OUTSIDE of the IRA. Since the conversion was made fairly quickly, I only have a few dollars of money earned within the accounts before the conversions. From what you've said above, it looks like these fees will offset the measly few bucks that we earned in these accounts, and so I will not need to report this money as gains. Is this true? If so, can I use the additional difference between the earned money and the fees paid to reduce my taxes?

ie, I guess I'm asking what happens if you report a net LOSS, and not gain, when making a Traditional/Roth IRA conversion. Is the loss (the difference between your non-deductable contributions and the net value after conversion) subtracted from your income, is it considered a capital loss (short term?) and thus can only offset capital gains if you're already above the $3000 capital loss threshold, or what? I hope not too many people will encounter this situation after the great bull market of the past few years, but then again there are lots of bad investments out there, and this situation must have been anticipated.>>


I assume these are the only<,/b> IRAs owned by you and your spouse. If not, you may not have a loss at all. That's because during the conversion you must treat all traditional IRAs as one to determine what part of the conversion money is or is not taxable. For the sake of argument, let's assume these are your only IRAs and you converted the whole shebang.

You will get a 1099R showing the net distributions from those IRAs. You will also file Form 8606 to show those distributions came from nondeductible contributions to your traditional IRAs. When you complete the Form 8606, the net result will be zero income to report for taxation purposes as a result of the conversions.

As to the loss issue, please understand I am not a tax expert. Nor have I seen anything in print from the IRS or any other source to confirm what I am about to say. Indeed, you may want to repose this question in the Tax Strategies folder to verify my response with TMF Taxes, as Roy is our in-house authority for tax issues. Nevertheless, here's what I believe.

If these are the only IRAs owned by you and your wife, then the conversions constitute taxable total distributions from the traditional IRAs. You suffered a loss on conversion and you have a basis in the IRA through your nondeductible contributions. Therefore, you may claim that loss as a miscellaneous itemized deduction (subject to the 2% AGI limit) on Schedule A, Form 1040. Chances are, it will be too small to really qualify because it must exceed 2% of AGI.

OTOH, if you have other IRAs, then my bet is after you work through Form 8606 you're gonna discover you will indeed have income to report as a result of the conversions.

Regards….Pixy



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