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Investing/Strategies / Retirement Investing
|Subject: Re: 401k distribution||Date: 1/9/2004 4:59 PM|
|Author: JAFO31||Number: 38444 of 78166|
baldguy13: "I'm starting to confuse myself."
It is easy to do.
"I understand that will reduce the investable dollar amount, but I thought I also heard that there was no early withdrawal penalty for closing a Roth (the caveat being you couldn't open another one for a year)."
No. In general, new contributions to a Roth IRA can be withdrawn at any time without tax effect. I am a little hazy at the moment for the rule WRT to conversions, but I vaguely recall that conversions need to be in the account for 5-years; PLEASE DO NOT TRUST MY MEMORY if this is an issue that matters to you. Earnings are an entirely different story.
"If this is the case, you would have to pay early withdrawal penalties on the traditional IRA to open the Roth?"
You need to keep the steps in the process clear.
Money in a 401-k can be withdrawn (taxable event), transferred to another 401-k plan that accepts transfers (non-taxable event), or rolled over or transferred to a traditional IRA (non-taxable event if handled correctly); the 401-k money cannot be transferred directly to a Roth IRA.
Once the money is in a traditional IRA it can, suject to MAGI limit and other applicable rules, be transferred to a Roth IRA (which is generally a taxable, except to the extent that you have basis in the IRA).
I will assume zero basis, for the balance of the discussion.
If you transfer the entire amount of the traditional IRA to the Roth IRA, it will all be taxable income and taxes will be due. As we discussed, the general recommendation is to pay those taxes with other funds.
If you transfer only a portion of the traditional IRA to a Roth IRA, such portion will be taxable income, and if you retain the balance of the traditinonal IRA to pay the taxes dues, that will be a distribution from the traditional IRA, which would be taxable, and unless you are of age or otherwise satisfy one of the alternatives, it would be an early withdrawal, subjec