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Subject:  Re: 401(k) to IRA rollover question Date:  7/9/1999  1:14 PM
Author:  Bob78164 Number:  11864 of 88494

PJGeorge writes (in part):

If I roll my 401(k) into a traditional IRA, and then into a Roth IRA I pay taxes on the full 73K like it was income?? If so, that'll put me in the 33% tax bracket and I'll only have about 49K to put in my Roth IRA.

I reply:

I infer from this passage that you would pay the taxes from the funds to be converted. If so, then the case for conversion to a Roth IRA in your cicumstances is even worse than you've made it out to be. The withdrawal in order to pay taxes would be a premature distribution, and so would be penalized an additional 10%.

On the other hand, you are entitled to convert only part of your traditional IRA. If you can pay the taxes without raiding the IRA, then IMHO, the biggest determiner as to whether the Roth IRA conversion makes sense is whether you expect your tax rate on retirement to be higher than your present tax rate. But you have to run the numbers (as you did). You always have to run the numbers.

One other point. If you already have a traditional IRA with a non-zero basis that you plan to convert, do so before rolling over the 401(k). Otherwise, you will find your basis spread over the sum of your previously existing IRA and the rollover funds, decreasing your basis in the converted funds and increasing your tax hit. Good luck! --Bob
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