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I am disabled, and as I understand it, therefore my 401K funds are available to me for distribution without penalty. I am no longer eligible to contribute to the 401K plan or gain the benefits of employer matching 401k funds. The plans available to me through the employer chosen investment options do not even match an S&P index fund.

I believe it would be FOOLish to move this money into a Roth IRA, where I can self-direct the investment of these funds.

My income is not over the Roth IRA limits.

I will be 59 1/2 in October 2000.

I've read all your articles and looked at several other sites for Roth info.

I'd like you to review the steps I intend to take and my understanding of their consequences and tell me if I have overlooked or misunderstood anything.

Step 1. I rollover my 401K to a traditional IRA at my chosen brokerage (this has no tax consequences, but allows me to get ALL the money from the 401K into a single IRA, which I could NOT do if I withdrew the 401k money. I must rollover to a traditional IRA first because rollovers from 401Ks to Roth IRAs are not allowed. I must rollover ALL 401K funds into a SINGLE traditional IRA; I am not allowed to split it into more than one IRA account)

2. I convert the traditional IRA to a Roth IRA (at this time I must pay taxes, at my current tax rate for the entire amount ... approximately $30,000 ... at which point this money, now in the Roth IRA MAY be withdrawn freely with no penalties or taxes once I am 59 1/2, even if the 5 years has not elapsed, although any profits made on the initial funds may NOT be withdrawn until the full five years are up).

3. Once the conversion to Roth IRA has taken place, I can invest the funds anyway I want within the account and all profits are tax-free; losses may NOT be used as tax deductions).

Thanks for your help.

Harp Conn
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In your situation you may want to look into keeping it in the regular IRA unless you are planning to hold it in the roth for awhile without distributions. That way the tax can be spread over many years. Run the numbers and see. If you were not so close to retirement the Roth is the better deal, when you are within five years or so, it may not be depending on your situation. You may withdraw from a traditional ira at 59 1/2 as well.
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The reason I want to get the money into a Roth IRA instead of a 401K or regular IRA is so my profits (or losses) will be tax-free.

I will not change status from Long Term Disability to "Retired" until I'm forced to at 65. I plan to hold the money in the Roth and make it grow as well as I can through investing with the money IN THE ROTH as long as is humanly possible, taking out only the minimum (if any) I require for retirement income supplement or if I have health care or other unexpected expense.

I'd like to rollover the 401K money into two Roth IRAs, half of the money each year for the next two years to try to keep the tax impact from bumping me into a higher bracket if I have to take the whole hit in one year. Can I do that? Or do I have to rollover ALL or NOTHING?
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I guess the key here is that my income will NOT change significantly when I go from "disabled" category to "retired" category, so there is no significant tax benefit that I can see to waiting to pay taxes on the IRA or 401K rollover money ... and a big incentive to get the EARNINGS into a tax free status as soon as possible.

Does this make sense?
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