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Author: Kenjisan Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121061  
Subject: 401(k)/IRA?? Date: 6/24/1999 2:10 PM
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So I learned that I may transfer/rollover money in a 401(k)(no longer employed) to an IRA account with a broker lets say.

To clarify:
1) I can trade in that account, selling and buying equities, using the Foolish Four, or index funds and I accrue no short-term capital gains or regular capital gains tax no matter how many times I trade in a year?
The tax is only paid on collection at retirement age?
Basically, by doing this you can avoid short-term capital gains? Also, when you finally begin collecting how is the tax calculated regarding the microsoft you
bought and sold in one month's time 35 years ago? Is it all taxed at one rate at retirement regardless of how long you held the equity?

2)I have two 401(k)'s. one with company A which I have not worked for for 2 years and the other with my present employer. Since I never moved/touched the original 401(K) can I roll/transfer it over into an IRA at anytime. I know there is a 60 day rollover grace one you commit to the rollover...but is there one for actually choosing to do a transfer/rollover?

3) I assume since most people choose pre-tax contributions for their 401(k) through their employer that you CANNOT, after no longer being employed, rollover/transfer pre-tax 401(k) money into a Roth IRA, Correct? I assume a pre-tax 401(k) account MUST be rolled/transfered over into a traditional IRA???

Thanks very much.

P.S Does anyone know if this motley fool tax guide deals with specific questions like this or is it more legalese (sp?). Too many books are written with no real-world situations, especially tax ones.

I choose
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Author: Bob78164 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 16571 of 121061
Subject: Re: 401(k)/IRA?? Date: 6/24/1999 4:43 PM
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Kenjisan writes:

1) I can trade in that [conduit IRA] account, selling and buying equities, using the Foolish Four, or index funds and I accrue no short-term capital gains or regular capital gains tax no matter how many times I trade in a year? The tax is only paid on collection at retirement age? Basically, by doing this you can avoid short-term capital gains? Also, when you finally begin collecting how is the tax calculated regarding the microsoft you bought and sold in one month's time 35 years ago? Is it all taxed at one rate at retirement regardless of how long you held the equity?

2)I have two 401(k)'s. one with company A which I have not worked for for 2 years and the other with my present employer. Since I never moved/touched the original 401(K) can I roll/transfer it over into an IRA at anytime. I know there is a 60 day rollover grace one you commit to the rollover...but is there one for actually choosing to do a transfer/rollover?

3) I assume since most people choose pre-tax contributions for their 401(k) through their employer that you CANNOT, after no longer being employed, rollover/transfer pre-tax 401(k) money into a Roth IRA, Correct? I assume a pre-tax 401(k) account MUST be rolled/transfered over into a traditional IRA???


I reply:

(1) Your understanding is correct, but the deal isn't as good as it looks. You may trade to your heart's content within an IRA without incurring any present tax liability. Taxes will be collected when you distribute the money out of the IRA (assuming that it's a traditional IRA), or not at all (if it's a Roth). When taxes are collected, though, the ordinary income rate, not a capital gains rate (either short- or long-term) will be used on your distributions, less your basis (if non-zero). This is why a taxable account can be better than a traditional IRA for your retirement money, especially if you are a long-term buy-and-hold investor. To know, though, you have to run the numbers.

(2) The bottom line answer is that all of your options remain open at this point. For details, I have to clear up a point of terminology. A "rollover" is what happens when you have the distribution check written directly to you, intending to redeposit the funds in an IRA. The 60 day limit is the amount of time you have to get the money into an IRA, measured either from when the check to you is written, when you receive it, or when you cash it (I'm not sure which). I can't think of any circumstances in which anyone would want to do a rollover, though, because there are potentially ugly complications stemming from a mandatory 20% withholding imposed on rollover distribtions. What most people do is a custodian-to-custodian "transfer." Because you never get the money, there are no time limits.

(3) You can get money from a former employer's 401(k) into a Roth IRA, but the process requires two steps. First, get it into a traditional IRA, preferably via custodian-to-custodian transfer. Then, "convert" the traditional IRA into a Roth IRA. The two-step process is necessary because Roth IRAs can only accept contributions (other than the usual $2000 per year) from other Roth IRAs or from traditional IRAs. Good luck! --Bob

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Author: Kenjisan Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 16573 of 121061
Subject: Re: 401(k)/IRA?? Date: 6/24/1999 5:38 PM
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(1) Your understanding is correct, but the deal isn't as good
as it looks. You may trade to your heart's content within an
IRA without incurring any present tax liability. Taxes will be
collected when you distribute the money out of the IRA
(assuming that it's a traditional IRA), or not at all (if it's a
Roth). When taxes are collected, though, the ordinary
income rate, not a capital gains rate (either short- or
long-term) will be used on your distributions, less your
basis (if non-zero). This is why a taxable account can be
better than a traditional IRA for your retirement money,
especially if you are a long-term buy-and-hold investor. To
know, though, you have to run the numbers.

But won't any money that's in the 401(K) also be taxed at the income rate? meaning, either way I'm going to get taxed...whether in a 401K or regular IRA?

(2) The bottom line answer is that all of your options remain
open at this point. For details, I have to clear up a point of
terminology. A "rollover" is what happens when you have
the distribution check written directly to you, intending to
redeposit the funds in an IRA. The 60 day limit is the
amount of time you have to get the money into an IRA,
measured either from when the check to you is written,
when you receive it, or when you cash it (I'm not sure
which). I can't think of any circumstances in which anyone
would want to do a rollover, though, because there are
potentially ugly complications stemming from a mandatory
20% withholding imposed on rollover distribtions. What
most people do is a custodian-to-custodian "transfer."
Because you never get the money, there are no time limits.

I understand the differences...my question was in regards to the time limit, if any, to choose to do a rollover or transfer. I haven't been employed for more than two years with the company that holds my first 401K....if I choose to, can I transfer in 2000 or 2030. Is there a time limit to make a rollover or transfer or can I do it at any time I see fit (understanding once a year limits). Understand?

(3) You can get money from a former employer's 401(k)
into a Roth IRA, but the process requires two steps. First,
get it into a traditional IRA, preferably via
custodian-to-custodian transfer. Then, "convert" the
traditional IRA into a Roth IRA. The two-step process is
necessary because Roth IRAs can only accept contributions
(other than the usual $2000 per year) from other Roth IRAs
or from traditional IRAs. Good luck! --Bob

I'm still unclear as to my main question here. Can I specifically take pre-tax 401K money and "transfer" to a ROTH IRA. I question this because I am taking pre-tax retirement money(401K pre-tax-contributions) and essentially putting it into a ROTH IRA which by nature is a non-tax-deffered vehicle. Whether in two stops, 401K to traditional IRA to a ROTH, or not isn't my question. Won't I incurr taxes somewhere along the line here. Pre-tax 401K to traditional IRA to ROTH IRA doesn't seem correct in leiu of the tax issue. Are you neglecting to mention that I need to pay taxes each year on the ROTH? Sorry for confusion....if you could clarify...Thanks.

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Author: Bob78164 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 16576 of 121061
Subject: Re: 401(k)/IRA?? Date: 6/24/1999 6:34 PM
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Continuing our conversation, Kenjisan writes:

(1) But won't any money that's in the 401(K) also be taxed at the income rate? meaning, either way I'm going to get taxed...whether in a 401K or regular IRA?

(2) I understand the differences...my question was in regards to the time limit, if any, to choose to do a rollover or transfer. I haven't been employed for more than two years with the company that holds my first 401K....if I choose to, can I transfer in 2000 or 2030. Is there a time limit to make a rollover or transfer or can I do it at any time I see fit (understanding once a year limits).

(3) I'm still unclear as to my main question here. Can I specifically take pre-tax 401K money and "transfer" to a ROTH IRA. I question this because I am taking pre-tax retirement money (401K pre-tax-contributions) and essentially putting it into a ROTH IRA which by nature is a non-tax-deffered vehicle. Whether in two stops, 401K to traditional IRA to a ROTH, or not isn't my question. Won't I incurr taxes somewhere along the line here. Pre-tax 401K to traditional IRA to ROTH IRA doesn't seem correct in leiu of the tax issue. Are you neglecting to mention that I need to pay taxes each year on the ROTH?


I reply:

(1) You're correct -- either way the money will be taxed as ordinary income.

(2) As long as you do a transfer, there is no time limit, and there also is no limitation as to how often you may transfer (as opposed to roll over) funds.

(3) The conversion from traditional to Roth IRA is the point where you incur tax liability.

Hope I cleared things up. If not, you know where to find us! --Bob

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Author: dvige4 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 16585 of 121061
Subject: Re: 401(k)/IRA?? Date: 6/25/1999 12:33 AM
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(3) You can get money from a former employer's 401(k) into a Roth IRA, but the process requires two steps. First, get it into a traditional IRA, preferably via custodian-to-custodian transfer. Then, "convert" the traditional IRA into a Roth IRA. ... Good luck! --Bob

That's exactly what I've just done .. but I only learned tonite about utilizing a "conduit" IRA as an interim step between my previous employer's 401k plan and my new employer's 401k plan ... so, here's my question .. can I still use the IRA as a "conduit" if I've converted it into a Roth IRA? And if so, will the tax liability I would've incurred in the traditional-to-Roth conversion considered "forgiven" once the money is folded into my new 401k plan??
Hope this was clear as mud ...
:) David

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Author: dvige4 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 16586 of 121061
Subject: Re: 401(k)/IRA?? Date: 6/25/1999 12:48 AM
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I'm still unclear as to my main question here. ... Won't I incurr taxes somewhere along the line here. Pre-tax 401K to traditional IRA to ROTH IRA doesn't seem correct in leiu of the tax issue. Are you neglecting to mention that I need to pay taxes each year on the ROTH? Sorry for confusion....if you could clarify...Thanks.

Yes, you WILL incur a tax liability with the traditional-to-Roth IRA conversion .. however, it's a ONE-TIME liability, which is an extremely important point!! Upon conversion to the Roth, the money becomes taxable income. But after you've paid the Piper (Uncle Sammie) that one time, from that point on your investment along with the dividends it earns are tax-free!! (keep in mind that there are certain requirements as to length of time the money must remain in the Roth, etc.) The MOST IMPT point here is that if you leave the money invested in the Roth until retirement, and it FOOLISHLY grows like gangbusters, you won't pay any tax on it when you begin taking your distributions at retirement!!! THAT, my dear Foolish Friend, is the absolute beauty of a Roth IRA!!! :))) I, for one, don't have a problem w/ not being able to write-off the $2k/yr I'll invest in a Roth in order to enjoy tax-free distributions that have grown immensely by the time I retire (I'm a mere 36yo right now, so I've a good 25yrs for my investment to grow, Grow, GROW!!!!!
fOoL oN!!
:) David

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Author: dvige4 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 16587 of 121061
Subject: Re: 401(k)/IRA?? Date: 6/25/1999 1:05 AM
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I'm still unclear as to my main question here.

You may want to visit the following website and scroll down until you find the section on Roth IRAs .. it provides a nice summary of the specifics of Roths ...

http://www.401k.com/401k/pfp/wisdom/pond_0498.htm#2

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Author: Bob78164 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 16602 of 121061
Subject: Re: 401(k)/IRA?? Date: 6/25/1999 1:53 PM
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dvige4 writes:

I only learned tonite about utilizing a "conduit" IRA as an interim step between my previous employer's 401k plan and my new employer's 401k plan ... so, here's my question .. can I still use the IRA as a "conduit" if I've converted it into a Roth IRA? And if so, will the tax liability I would've incurred in the traditional-to-Roth conversion considered "forgiven" once the money is folded into my new 401k plan??

I reply:

I may be wrong about this, but my guess is that if you "reconvert" the Roth IRA to a traditional, you will restore its conduit status (assuming that you haven't tainted it with other contributions). I am certain that reconverting it will erase your tax liability for the conversion, and I am almost certain that you cannot transfer money directly from a Roth IRA to a 401(k). I'll be interested to see better informed answers. --Bob

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Author: dvige4 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 16608 of 121061
Subject: Re: 401(k)/IRA?? Date: 6/25/1999 7:55 PM
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I may be wrong about this, but my guess is that if you "reconvert" the Roth IRA to a traditional, you will restore its conduit status (assuming that you haven't tainted it with other contributions). I am certain that reconverting it will erase your tax liability for the conversion, and I am almost certain that you cannot transfer money directly from a Roth IRA to a 401(k). I'll be interested to see better informed answers. --Bob

I contacted my IRA administrator and fortunately was able to cancel the Rollover-to-Roth conversion. The next thing I'll do is fold the money into my new 401k plan! And by the way, Bob, you were right .. it is not possible to transfer money directly from a Roth IRA to a 401k. My strategy was going to be just as you stated above -- reconvert the Roth back to a traditional and see if my 401k plan administrators would then allow me to fold the money into my new 401k acct. But the way it worked out is even better ... needless to say, I'm thrilled that I learned about "conduit" IRAs this week!! In this way, I'll be able to add the Rollover IRA ($1400) to my existing 401K plus fund a new Roth IRA with $2k for 1998. In this way I've gained an addt'l $1400 of tax-free retirement investing in '98 rather than just adding an addt'l $600 to the $1400 within the IRA to bring it to a maximized $2k Roth ...
Believe it or not, you're reading this from someone who new NOTHING about investing (retirment or otherwise) until reading the Motley Fool workbook a few months back ... Thx guys!!
:) David

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Author: Bob78164 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 16609 of 121061
Subject: Re: 401(k)/IRA?? Date: 6/25/1999 9:19 PM
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dvige4 writes (in part):

I'm thrilled that I learned about "conduit" IRAs this week!! In this way, I'll be able to add the Rollover IRA ($1400) to my existing 401K plus fund a new Roth IRA with $2k for 1998. In this way I've gained an addt'l $1400 of tax-free retirement investing in '98 rather than just adding an addt'l $600 to the $1400 within the IRA to bring it to a maximized $2k Roth.

I reply:

I think you're under a misapprehension that may change your decision. Money added via rollover to an IRA has nothing to do with the $2000 annual contribution limit. In other words, you can leave the money in a conduit IRA, reinstate the Roth conversion, or do pretty much anything else you like and still contribute $2000 to IRAs this year. You can even add $2000 to the conduit IRA, although if you do, you will "taint" the money and never again be able to put it in an employer's 401(k). As discussed below, most Fools don't consider that a serious disadvantage, but it's a consequence of which you should be aware.

Your philosophy is a little unusual (around Fooldom) in that you're trying to get money into a 401(k) from an IRA; most Fools try to do the opposite. After all, if you like the options in your company's 401(k), there's nothing to stop you from copying them in an IRA. And if you decide that you'd like to do something with the money that is not an option within the 401(k), odds are that you can do it within the IRA.

As TheBadger succinctly summarized earlier this week (I think), there are only three potential advantages for a 401(k) over an IRA, and 90% of the time, none of them apply. They are (1) once in a while investment options (usually company stock) are available through the 401(k) on advantageous terms that are not available outside the plan; (2) you can often borrow from your 401(k) (although this is usually a bad and risky idea, because you hurt your return and risk financial disaster if you lose your job while you're still repaying the loan), but never from your IRA; and (3) you can withdraw unlimited money from your 401(k) at age 55 without penalty (assuming that you've separated from service with that employer), but you must wait until age 59 1/2 to withdraw unlimited amounts from an IRA without penalty.

There's no rush. Take your time, get a firm grasp of all your options, and then make your decision. That's Foolish. Good luck, and keep us posted! --Bob

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Author: dvige4 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 16612 of 121061
Subject: Re: 401(k)/IRA?? Date: 6/26/1999 9:52 AM
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Bob78164 says:

I think you're under a misapprehension that may change your decision. Money added via rollover to an IRA has nothing to do with the $2000 annual contribution limit ...

So, I'm in Barnes & Noble last nite, perusing the investing tomes, and I come across that very fact! Yikes!! Needless to say, I contacted by IRA Administrator this morning and reinstated the Rollover-to-Roth conversion ...

Your philosophy is a little unusual (around Fooldom) in that you're trying to get money into a 401(k) from an IRA ...

Not any more!!!

There's no rush. Take your time, get a firm grasp of all your options, and then make your decision. That's Foolish. Good luck, and keep us posted! --Bob

I think I need to add a small disclaimer to my lost post ... before reading the Motley Fool Investment Workbook a few months back I didn't know a thing about investing, and, I've still got a loooong way to go ... but like my investments, at least I've begun!!
Thanks again for the valuable feedback, Bob ... hopefully all of this will help other Fools avoid folly ...
:) David

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 16643 of 121061
Subject: Re: 401(k)/IRA?? Date: 6/27/1999 3:05 PM
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[[P.S Does anyone know if this motley fool tax guide deals with specific questions
like this or is it more legalese (sp?). Too many books are written with no
real-world situations, especially tax ones.]]

I believe that 2 of your 3 questions are covered in the TMF Tax Guide. We wrote the guide for real world issues...not just to spew out tax law. We try to provide as many examples as possible for various investment issues.

Our next book might deal a little bit more with retirement planning issues, but the first deals primarily with basic investment and tax issues. You might want to check it out.

TMF Taxes
Roy

Want to learn more about taxes and investing? Then we have a deal for you!! The Motley Fool Investment Tax Guide is now available through Fool Mart. Don't be the LAST one on your block to own this masterpiece, since it's sellin' fast. Remember: It's never to early to start planning for your 1999 taxes. So just click on this link (http://www.foolmart.com/market/product.asp?pfid=MF+013+I) to read more about this amazing collection of tax information. (Apologies for the shameless plug…but it is a pretty good book…if I do say so myself). In addition, if you would like to visit the Taxes FAQ (Frequently Asked Questions) area, click on http://www.fool.com/school/taxes/taxes.htm and you'll be right at the home page. Check it out. Finally, if you need to get to the IRS web site, click on http://www.irs.ustreas.gov to go directly there.


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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 16644 of 121061
Subject: Re: 401(k)/IRA?? Date: 6/27/1999 3:09 PM
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[[ so, here's my question .. can I still use the IRA
as a "conduit" if I've converted it into a Roth IRA?]]

Nope...sorry...it's not long gone. It's been tainted by the fact that you essentially took a distribution of the funds, elected to pay taxes on that distribution, and then convert those funds to a Roth IRA. So you have now lost the "condiut" feature.

Sorry....

You can also learn more about Rollovers vs. Transfers in my featured article in the Taxes FAQ area on this very subject. You might want to check it out.

TMF Taxes
Roy

Want to learn more about taxes and investing? Then we have a deal for you!! The Motley Fool Investment Tax Guide is now available through Fool Mart. Don't be the LAST one on your block to own this masterpiece, since it's sellin' fast. Remember: It's never to early to start planning for your 1999 taxes. So just click on this link (http://www.foolmart.com/market/product.asp?pfid=MF+013+I) to read more about this amazing collection of tax information. (Apologies for the shameless plug…but it is a pretty good book…if I do say so myself). In addition, if you would like to visit the Taxes FAQ (Frequently Asked Questions) area, click on http://www.fool.com/school/taxes/taxes.htm and you'll be right at the home page. Check it out. Finally, if you need to get to the IRS web site, click on http://www.irs.ustreas.gov to go directly there.


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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 16645 of 121061
Subject: Re: 401(k)/IRA?? Date: 6/27/1999 3:11 PM
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[[You may want to visit the following website and scroll down until you find the
section on Roth IRAs .. it provides a nice summary of the specifics of Roths ... ]]

Heck...you don't even need to go out of the Fool area. You can find my multi-part series on the Roth IRA right here in Fooldom!!

Check it out at: http://www.fool.com/school/taxes/taxes.htm

Why leave home when you can stick around the Fool and get the same information???

TMF Taxes
Roy

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 16646 of 121061
Subject: Re: 401(k)/IRA?? Date: 6/27/1999 3:23 PM
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[[I may be wrong about this, but my guess is that if you "reconvert" the Roth IRA to a traditional,
you will restore its conduit status (assuming that you haven't tainted it with other contributions).]]

Good thinkin' Bob. I didn't even think about the reconversion issue. It seems clear, at least to me, that if the Roth IRA is reconverted back to a traditional IRA, and there were no other contributions in the meantime (either in the "old" conduit IRA or the Roth IRA while in existence) that would "taint" the IRA, that the reconverted traditional IRA WOULD still be considered a conduit IRA.

There are no specific regulations or code sections on this that I can find, but it would seem to follow the rules regarding conduit IRAs.

[[I
am certain that reconverting it will erase your tax liability for the conversion,]]

And, as usual...you are correct.

[[ and I am almost
certain that you cannot transfer money directly from a Roth IRA to a 401(k).]]

No way possible that I'm aware of to make a move directly from a 401k to a Roth IRA. The regulations are very clear: Only a traditional IRA can be converted to a Roth IRA. You can't go directly from a 401k to a Roth IRA.

TMF Taxes
Roy

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Author: Bob78164 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 16694 of 121061
Subject: Re: 401(k)/IRA?? Date: 6/28/1999 1:39 PM
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In response to one of my replies (noted in bold), TMFTaxes writes (in part):

I am almost certain that you cannot transfer money directly from a Roth IRA to a 401(k).

No way possible that I'm aware of to make a move directly from a 401k to a Roth IRA.


I reply:

Whoops! We're talking past each other. I knew that one cannot transfer money from a 401(k) to a Roth without making a stopover in a traditional IRA. My confidence level drops to about 97%, though, when we want the money to go the other way around, from the Roth IRA to the 401(k). Of course, I didn't note that there is virtually never any reason to do so, because qualified distributions from a Roth are tax free whereas distributions from a 401(k) will eventually be taxed. --Bob

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 16712 of 121061
Subject: Re: 401(k)/IRA?? Date: 6/28/1999 8:37 PM
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[[Whoops! We're talking past each other. I knew that one cannot transfer money
from a 401(k) to a Roth without making a stopover in a traditional IRA. My
confidence level drops to about 97%, though, when we want the money to go
the other way around, from the Roth IRA to the 401(k).]]

Right...sorry...many times I have to slow down and read more carefully. This was one of those times, Bob.

[[ Of course, I didn't
note that there is virtually never any reason to do so, because qualified
distributions from a Roth are tax free whereas distributions from a 401(k) will
eventually be taxed.]]

But to answer the question that you pose, it appears reasonable, that if the Roth IRA was originally a condiut IRA, and the Roth IRA is recharacterized, it would then qualify as a conduit IRA (assuming no tainted contributions within either the IRA or the Roth IRA), and could then go to a 401k plan.

But that would be the ONLY way that I can think of that a Roth IRA could go back to a 401k. And, to tell you the truth, I'm not 100% sure of that myself.

TMF Taxes
Roy

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