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Subject:  Re: 401 k direct rollover vs. transfer to IRA Date:  10/14/2002  2:01 PM
Author:  Bob78164 Number:  61705 of 127613

cabreck writes (in part):

What are the different tax implications of: a direct rollover into a new personal retirement account versus the transfer of the funds to an personal IRA account?

And are there any advantages to converting the funds into a Roth IRA?
I am 31 now, still awhile until I am buying a Winnebago.

I reply:

I think you're asking the difference, for tax purposes, between funding your soon-to-be-established traditional IRA with a direct rollover and funding it some other way. A direct rollover is almost certainly preferable. If you withdraw the money yourself from your former employer's retirement plan, they will almost certainly withhold 20% for taxes. You will then be responsible for getting that 20% into an IRA within 60 days from your other funds; if you don't, it will be deemed a premature distribution and you will pay taxes, a 10% penalty, and New York state taxes (and possibly state penalties as well). If you do a custodian-to-custodian "direct rollover," you won't have to worry about any of this; the money will simply disappear from one account and reappear in the other.

Once the funds are in a traditional IRA (and not before), you may elect to convert the traditional IRA (or any part of it) into a Roth IRA. You will have recognize as income the amount of the conversion in the year of the conversion. The strongest contra-indicator to doing this is when you would not be able to afford the additional taxes from non-retirement accounts. The strongest indicator that converting to a Roth is a good idea is if you anticipate a higher marginal tax rate in retirement than you have now. The only way to be sure, of course, is to make some assumptions (or several sets of assumptions) and run the numbers. --Bob
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