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Subject:  Re: 401k, Traditional IRA, Roth IRA? HELP Date:  11/18/1998  4:48 PM
Author:  TMFPixy Number:  6659 of 96381

Greetings, StressedFool, and welcome. You asked:

<<I currently have a 401k (about $12,000) which I left intact when I left my former employer. Considering the fund options (the guaranteed government securities has the highest return for the year - what does that tell you!)and a letter I recieved today that two of the funds are getting a new manager, I don't think that I could do any worse on my own. I know that if I convert to a ROTH IRA I have to do it by the end of the year and can spread the tax over four years. >>

Essentially that's correct except that you cannot go directly from the 401k plan to a Roth. You must first transfer the funds to a traditional IRA. Once there, the money can then be transferred to a Roth IRA. Also, you are not spreading the tax over the four years. You're spreading the income you must declare as a result of the conversion. Taxes will be based on your taxable income in each of those years.

<b?I have a substantial increase in salary this year but AGI will still fall in the 28% bracket - next year will be iffy. I'm 54 but don't expect to retire any time soon. Can I roll this into a self-directed IRA and make contributions or do I have to set up a new IRA in order to make contributions? If I have DRIP's in a self-directed IRA do the dividends count towards the amount that I can contribute? I like the ROTH IRA since it has inheritance advandages but ---?

Select a broker and arrange to have your 401k money transferred to a traditional IRA first. The broker and your plan administrator will tell you what to do. Instruct the broker whn the 401k money is in the traditional IRA, you then want the traditional IRA converted to a self-directed Roth IRA so you may trade on your own. You may make annual contributions to that account legally. Just ensure the broker understands that is what you want to do. Some are still complying with outdated IRS guidance that says not to allow conversion money and contribution money to be mixed. That guidance no longer applies, but some IRA providers haven't caught on to that fact yet. Your reinvested dividends and any earnings on the money inside the IRA will not and do not count towards your annual contribution limit of $2K.

Should you convert? Maybe and maybe not. Much depends on your marginal tax bracket today versus that of tomorrow; on how you will pay for the taxes due on the conversion; on how long the money can sit in the Roth before you use it; and on your estate planning needs. For some examples of things to consider, see my analysis on this board at . It will give you much food for thought.


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