UnThreaded | Threaded | Whole Thread (20) | Ignore Thread Prev Thread | Next Thread
Author: chopsueycp Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75701  
Subject: Simple question about 401k-to-IRA conversion Date: 2/24/2011 1:59 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Hello Fools,

I just left my old company and I want to convert my 401k to a regular old IRA (not a ROTH), so that I can have my own investment options.

I have a few questions about this:

1) Do I pay taxes on this rollover?

2) Do I have to even acknowledge this rollover in my taxes?

3) Will I still be able to take a loan on this money, or does the rollover to the IRA make this impossible?


Thanks,
Carl
Print the post Back To Top
Author: 0x6a74 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68533 of 75701
Subject: Re: Simple question about 401k-to-IRA conversion Date: 2/24/2011 2:08 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
1) Do I pay taxes on this rollover?

2) Do I have to even acknowledge this rollover in my taxes?

3) Will I still be able to take a loan on this money, or does the rollover to the IRA make this impossible?



no *

no *

and NO! **


* have the new custodian (broker) handle the transfer, if the 401(k) cuts a check to YOU ,they may take withholding which you should get back when you do your taxes

** and pretty sure that when you leave a company, you can no longer borrow from that 401(k) .... i can't recall any advantage to not rolling over.

Print the post Back To Top
Author: chopsueycp Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68534 of 75701
Subject: Re: Simple question about 401k-to-IRA conversion Date: 2/24/2011 2:17 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Regarding #3:

Will I still be able to take a loan on this money, or does the rollover to the IRA make this impossible?
(Answer: NO)


If I were to instead roll this money over to a ROTH IRA, and pay taxes on the money, is that money considered a ROTH "contribution" and therefore available to me to withdrawal without penalty? Or am I basically completely unable to draw on these funds without penalty?


Carl

Print the post Back To Top
Author: 0x6a74 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68535 of 75701
Subject: Re: Simple question about 401k-to-IRA conversion Date: 2/24/2011 2:28 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
If I were to instead roll this money over to a ROTH IRA, and pay taxes on the money, is that money considered a ROTH "contribution" and therefore available to me to withdrawal without penalty? Or am I basically completely unable to draw on these funds without penalty?



though still a 'simple question' ,you're now beyond my expertise.


i *believe* it depends on how old the Roth is (if over 5 yrs, maybe)
and how old you are (if over 59.5, you can withdraw from IRA without penalty ..you're right that a withdrawal would be subject to tax as ordinary income)


if you don't get an expert answer by ,say, noon tomorrow, ask at the Tax board --
http://boards.fool.com/tax-strategies-100155.aspx?mid=291273...


-b

Print the post Back To Top
Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68536 of 75701
Subject: Re: Simple question about 401k-to-IRA conversion Date: 2/24/2011 3:11 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
2) Do I have to even acknowledge this rollover in my taxes?

0x got this one wrong. You do have to report the rollover on your tax return, but it's not taxable. You report the total amount rolled over and separately report the taxable amount which is added in to the rest of your income. Take a look at line 15 or 16 (I can't recall which) on your Form 1040. It's very common for the taxable amount to be zero.

--Peter

Print the post Back To Top
Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68537 of 75701
Subject: Re: Simple question about 401k-to-IRA conversion Date: 2/24/2011 3:13 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
If I were to instead roll this money over to a ROTH IRA, and pay taxes on the money, is that money considered a ROTH "contribution" and therefore available to me to withdrawal without penalty? Or am I basically completely unable to draw on these funds without penalty?

It's not a contribution. It's a conversion. You have to wait 5 years after the conversion before you can withdraw that amount and not pay a penalty.

--Peter

Print the post Back To Top
Author: reallyalldone Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68538 of 75701
Subject: Re: Simple question about 401k-to-IRA conversion Date: 2/24/2011 9:42 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
i can't recall any advantage to not rolling over.

Since he doesn't indicate his age, there is often the advantage of withdrawing from a 401K penalty free at 55 if you have left the employer.

Print the post Back To Top
Author: Watty56 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68539 of 75701
Subject: Re: Simple question about 401k-to-IRA conversion Date: 2/24/2011 4:44 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
I just wanted to mention that if there is company stock in the 401k then there are all sorts of special situations that apply so you need to research all the tax implications of moving or selling the company stock before you do anything.


Greg

Print the post Back To Top
Author: chopsueycp Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68540 of 75701
Subject: Re: Simple question about 401k-to-IRA conversion Date: 2/24/2011 7:12 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Thanks, all. I'm 30, so no chance I can sneak away penalty-free. Just trying to put together a down payment on a house and deciding if I should use this money or not.

Getting to 20% down would be a big benefit even if I had to loan against my 401k, but it looks like that's not an option.

Actually - just thought of something... what if I rolled it over into my new company's 401k, and then took a loan? That seems legitimate. What do you think?


- Carl

Print the post Back To Top
Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68541 of 75701
Subject: Re: Simple question about 401k-to-IRA conversion Date: 2/24/2011 7:39 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
Actually - just thought of something... what if I rolled it over into my new company's 401k, and then took a loan? That seems legitimate. What do you think?

Taking a loan from a 401k is a terrible idea. For one thing, most 401k's require you to immediately pay back the loan if you leave the company. If you don't, it is considered a withdrawal and you get dinged with income tax and early withdrawal penalty.

A self-directed IRA is much superior to a 401k in terms of investment choices and fees. I'd never roll over my 401k to a new employer's 401k.

You really need to closely study www.irs.gov/pub/irs-pdf/p590.pdf It has all the answers. It's just sometimes hard to get a complete understanding of the answers. ;-(
Get a hardcopy printout so you can yellow-line and cross-reference sections.

Print the post Back To Top
Author: chopsueycp Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68542 of 75701
Subject: Re: Simple question about 401k-to-IRA conversion Date: 2/24/2011 7:43 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
I agree that taking a loan against a 401k is a terrible idea...... unless it's the substitute for a mortgage. Aren't I paying that loan back at a much lower rate (and paying back to myself) than a 30-year fixed APR?

To me it seems smarter to loan against the 401k money and put that money into my house, then pay the loan back over time... instead of giving that much more interest $ to the bank

Thoughts?

Print the post Back To Top
Author: TMFBigFrog Big red star, 1000 posts Old School Fool Home Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68543 of 75701
Subject: Re: Simple question about 401k-to-IRA conversion Date: 2/24/2011 9:23 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 5
For one thing, check the terms on your 401(k). You may be limited to a loan of $50,000 or less (or half your balance). You may be forced to pay the loan back quickly and in full if you terminate from the company or otherwise have it viewed as a premature distribution. You may be limited to a shorter term on the loan than you can handle the payments on. You may be restricted on making further contributions above and beyond the loan repayment to your 401(k) while your loan is outstanding.

In short -- it's a huge potential minefield that can quickly turn what may have seemed like a good idea at the time under a certain set of assumptions and circumstances into an outright nightmare in practice.

-Chuck
Inside Value Home Fool

Print the post Back To Top
Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68544 of 75701
Subject: Re: Simple question about 401k-to-IRA conversion Date: 2/25/2011 12:08 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
Just trying to put together a down payment on a house and deciding if I should use this money or not.

If you roll the 401(k) over into an IRA, you can withdraw up to $10k penalty free (but not tax free) for the purchase of a home if you are a first-time homebuyer. See IRS Pub 590

Actually - just thought of something... what if I rolled it over into my new company's 401k, and then took a loan? That seems legitimate. What do you think?

This is a possibility, if you are happy with the new 401(k) plan, fees and investment choices.

The risk is that if you leave your employer, either voluntarily or involutarily, you may be required to pay back the loan in full within 30 - 90 days or you will end up with a non-qualified distribution and you will owe taxes and a 10% penalty. So if you get the best job offer ever before you've paid off the loan, you may end up either having to turn the offer down, or end up paying the taxes and penalty. If you get laid off, you wouldn't even have the ability to make the choice. So unless you other funds to pay off the loan with, it could end up being an expensive loan.

AJ

Print the post Back To Top
Author: 0x6a74 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68545 of 75701
Subject: Re: Simple question about 401k-to-IRA conversion Date: 2/25/2011 12:24 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
I agree that taking a loan against a 401k is a terrible idea...... unless it's the substitute for a mortgage. Aren't I paying that loan back at a much lower rate (and paying back to myself) than a 30-year fixed APR?

To me it seems smarter to loan against the 401k money and put that money into my house, then pay the loan back over time... instead of giving that much more interest $ to the bank


not 'terrible' (IMO), but very risky.

don't know that the 401k rate would be lower than mortgage ( for me, it was lower than auto-loan rate .. i WAS wild-&-crazy <g> ),

but could be ..and you are paying yourself ..and the higher down could get you out of PMI
Could be smart ,depending on all the numbers.


the danger, as everyone notes is in losing your job -- you need a back up plan just in case.

Print the post Back To Top
Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68546 of 75701
Subject: Re: Simple question about 401k-to-IRA conversion Date: 2/25/2011 8:41 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Once you look at what is actually going on, you realize that a 401k loan is NOT actually a loan! (At least not in any of the various 401k's that I've had. Perhaps a few others are different.)

What it *actually* is is a withdrawal that you are required to pay back over time, along with a slight additional amount in a sum that is computed as if it were interest.

The 401k doesn't just "lend" you money. It deduces the amount of your holdings by the loan amount. If you had $100K in the S&P500 fund and then took a $50K loan, and the S&P gained 10%, the value of your S&P holding would *not* be $110K----it would be $55K.
When you make the loan payments, that money is parcelled out to your current set of fund choices just like your regular paycheck contribution is.

As everyone notes, the "interest" isn't really interest, since you are paying it to yourself.
Also, a point that most people don't recognize about that "interest". You pay double tax on it. Your 401k contributions are before-tax money, and you pay income tax on the withdrawals. But the interest you pay on a loan is after-tax money, but you *also* pay income tax on it when you take a withdrawal.

Print the post Back To Top
Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68547 of 75701
Subject: Re: Simple question about 401k-to-IRA conversion Date: 2/25/2011 9:20 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 4
What it *actually* is is a withdrawal that you are required to pay back over time, along with a slight additional amount in a sum that is computed as if it were interest.

It *is* interest. A 401(k) loan converts part of your account into a bond-like instrument that you pay back over time, with gains at the fixed interest rate. If it wasn't interest, you wouldn't be paying back more than was withdrawn.

If you had $100K in the S&P500 fund and then took a $50K loan, and the S&P gained 10%, the value of your S&P holding would *not* be $110K----it would be $55K, plus a loan of $50k that is earning interest, for an effective total of $105k.

There, fixed that for you.

On the other hand, if the S&P 500 dropped by 10%, your 401(k) account would consist of $45k in an S&P 500 investment, plus a loan of $50k that is earning interest, or an effective balance of $95k, instead of $90k had you not taken out the loan.

As everyone notes, the "interest" isn't really interest, since you are paying it to yourself.

Doesn't matter if you are paying it to yourself - you will pay back more than you withdrew. You can title it 'interest' or 'investment gain' or 'additional money into your 401(k)' or whatever else you want - but it's still paying back more than you withdrew.

Also, a point that most people don't recognize about that "interest". You pay double tax on it.

This is a red herring. You pay no more tax in the year that you borrow the money, because *income* is what is taxed. The fact that you borrow money from your 401(k) does not affect your income.

When you go to withdraw the money, you pay no more tax on the withdrawal because you took out a 401(k) loan - the amount that you withdraw is taxed as income, no matter what the source was - interest that you paid yourself, or gains from other investments.

Since, over your lifetime, you will pay no more or less income tax whether or not you take out the loan, there is no 'double tax' paid.

The risk that needs to be taken into account when considering a 401(k) loan is the risk that it will turn into a non-qualified distribution, and therefore, will incur taxes and penalties on the remaining balance. In this case, that should be weighed against the additional potential cost of PMI and/or a higher interest rate on the mortgage, and the potential issuse of having a higher LTV loan if the house needs to be sold sooner than planned. There are risks and costs to every decision that is made - the OP will need to determine which decision has the more reasonable risks and costs for their situation.

AJ

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: Watty56 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68548 of 75701
Subject: Re: Simple question about 401k-to-IRA conversion Date: 2/25/2011 9:40 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
As I recall many 401k plans will not let you make additional contributions while you have an outstanding loan and maybe even for a period of time(6 months?) after you pay it back. This means that you may lose an employer match and being able to take the 401k contribution tax deduction. This could be a pretty expensive way to borrow money.

Greg

Print the post Back To Top
Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68549 of 75701
Subject: Re: Simple question about 401k-to-IRA conversion Date: 2/25/2011 9:58 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
As I recall many 401k plans will not let you make additional contributions while you have an outstanding loan and maybe even for a period of time(6 months?) after you pay it back.

Really? Because I've had 6 different 401(k) plans where I have looked at the loan provisions, and not one of them had this restriction. So either I have lived an incredibly charmed life with respect to 401(k) plans, or 'many' is more like 'some' or 'a few' or maybe even 'rarely'.

Several of my plans had restrictions like this in the case of hardship withdrawals, but never for loans. The OP would need to check their plan provisions to see if this was the case.

AJ

Print the post Back To Top
Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68550 of 75701
Subject: Re: Simple question about 401k-to-IRA conversion Date: 2/25/2011 11:21 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
Well, I wouldn't call interest that you pay to yourself "interest". I'd call it "moving your own money from one pocket to another".

Likewise, when you borrow out $50K of a $100K account, you don't get the returns (gains/losses) on $100K--you get it on 50K. It's not like borrowing 50K using the 100K position as collateral---which is how a real loan would act. A real loan would still have your entire $100K account invested.
The way a 401k loan acts is the same as a withdrawal with the caveat that you must put it back over 5 or 10 years.

However....taking out a 401k loan is overall superior to take a penalty-free withdrawal for a house downpayment. Because if you take a "loan" get to put the money back into the 401k, whereas if you take a withdrawal you are not allowed to put the money back in.

But really, it doesn't matter what you want to call the details. A 401k loan is a bad idea for a lot of reasons. Principally, as AJ, et. al. says because if you leave the employer you have to completely pay in back right away.

"If it's not worth doing, it's not worth doing well."

Print the post Back To Top
Author: Watty56 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68552 of 75701
Subject: Re: Simple question about 401k-to-IRA conversion Date: 2/25/2011 3:15 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 3
...Really? Because I've had 6 different 401(k) plans where I have looked at the loan provisions, and not one of them had this restriction. So either I have lived an incredibly charmed life with respect to 401(k) plans, or 'many' is more like 'some' or 'a few' or maybe even 'rarely'.....


I think mine has this limitation. A quick google found this;

From

http://www.investopedia.com/articles/retirement/06/eightreas...


If you borrow money from your 401(k) plan, most plans have a provision that prohibits you from making additional contributions until the loan balance is repaid. Even if your plan doesn't have this provision,....


It would at least be with checking first. It really dosn't matter what most plans do, it matters what your plan does.

Greg

Print the post Back To Top
UnThreaded | Threaded | Whole Thread (20) | Ignore Thread Prev Thread | Next Thread
Advertisement