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Hi,
My wife received a partial disbursement from her 401k because of being in a higher income level in her company, and we were wondering what to do with the money she received. We are considering two options to avoid paying taxes on it: roll it over into an IRA or put it in some sort of college fund for our son (who is to be born in April).

Questions:
1. Is there an income level that if reached prevents us from rolling it over into an IRA without paying taxes?
2. Are there college funds available that can be started for my son even though he's not been born yet? Is this even a tax free option?

Thanks in advance,
Tony
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Welcome to the Fool Tony!!!


1. Is there an income level that if reached prevents us from rolling it over into an IRA without paying taxes?


You can roll it into an IRA but it will most likely be a non-deductible IRA, meaning your contributions will be after-tax. Your earnings will grow tax free. You can check publication 590 (www.irs.gov/pub/irs-pdf/p590.pdf) from the IRS and it will have the details. They're not too bad and written in plain english (for a change...)

>>>From page 10 of publication 590>>>
Reduced or no deduction. If either you or your spouse
was covered by an employer retirement plan, you may be
entitled to only a partial (reduced) deduction or no deduction
at all, depending on your income and your filing status.
Your deduction begins to decrease (phase out) when
your income rises above a certain amount and is elimi-
nated altogether when it reaches a higher amount. These
amounts vary depending on your filing status.

<<<

2. Are there college funds available that can be started for my son even though he's not been born yet? Is this even a tax free option?

Kind of. I started mine (it's called a 529 plan) at the moment she was born and put 999-99-9999 for her SSN. I got the number a month later and then changed it. You could always start one for yourself and they change the beneficiary name to your child later. Check out www.savingforcollege.com for more details.

You might also want to check out the Coverdell. The fool has some great information on this. http://www.fool.com/college/college.htm. This again is after taxes contributions but your earnings will grow tax free. Depending on the state you live in you might get a tax deduction. This info is covered on the websites.

Sounds like your trying to keep the pre-tax bonus that the 401k offers. Really depends on your income but if it's to high then all you're going to get is tax-deferred earnings which is still a good thing. Some argue with long term capital gains being so low (15%) it may make sense to just invest in an Total Market index fund and let it ride.

Best of luck!

Jesse
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>> >>>From page 10 of publication 590>>>
Reduced or no deduction. If either you or your spouse
was covered by an employer retirement plan, you may be
entitled to only a partial (reduced) deduction or no deduction
at all, depending on your income and your filing status.
<<

Somewhat off-topic, but...anyone else out there think this needs to be rewritten? When this was originally written, an "employer retirement plan" was more frequently a defined-benefit pension. Yet those who *have* a defined-benefit pension can contribute as much into a 401(k) plan as those whose "employer retirement plan" is nothing more than an unmatched 401(k).

If the idea behind the limits on deductible IRAs were to make it fair for those without employer plans to "catch up," then shouldn't the laws also distinguish between those those lucky few who still have defined-benefit pensions and those who do not? After all, the ones who don't will need to be able to save more in order to have parity in terms of being able to save and invest for their own retirement...

#29
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Sorry for the late reply, but thanks for the tips!
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