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Greetings, objviv, and welcome. You wrote:

I am new to this board, and tried to search for the situation I face, with no luck. I will greatly appreciate you folks taking the time to read this thru, and point me to the appropriate resource(s).

My situation is this,
1) I was laid off, with a 2 week notice, on Dec 4, 2000! (Yeah, another dot-com crash! What a great Christmas gift, eh?). Hence, effective Dec 15, I no longer work for my previous employer.

2) Now, I want to rollover my 401(k) to an IRA/Roth-IRA with my brokers. Hopefully into a self-directed account to invest directly in stocks.

3) I received the forms last week.

My questions are thus,
a) I wanted to rollver the 401(k) to a Roth IRA. Its already 2001. For what tax year, must I look for the AGI limitations?

b) For what tax year, must I account for the rollover? Thus, what tax year must I pay the taxes for?

From what you write, it appears the money is still in the 401k. Therefore, it won't be transferred until sometime in 2001. That means 2001 becomes the tax year in which any taxable event pertaining to the transfer may occur.

You cannot transfer 401k money directly to a Roth IRA. By law, it must first go to a traditional IRA. Once in the traditional IRA, it may then be further transferred to the Roth. Whether you should do that or not depends on a lot of factors such as your tax rate today versus that in retirement; how you will pay the income taxes due on the conversion of the traditional IRA to a Roth IRA; how long the money may stay in the Roth until you use it; and the size of coupled with your desires for your estate.

c) I seem to be forgetting this, but the modified AGI; is that computed based on wages, salaries and tips MINUS the qualified 401(k) contributions amongst other things? The way I figure it, since we pay taxes on everything EXCEPT the 401(k) contributions, the AGI must take that into account. But, I can't find the relevant info in IRS publications either. It is too early to get the W-2, thus my question.

The amount you convert from the traditional IRA will not count as part of your AGI in determining whether you can convert or not; however, it will count as part of AGI when computing the taxes you will owe after the conversion takes place. If your AGI is $90K before the conversion and you have $20K in the traditional IRA, then you may convert the $20K to a Roth. After the conversion, you must add that $20K to your AGI of $90K to get a new AGI of $110K on which you will compute your income tax bill.

d) Even if the rollover must be accounted for tax year 2000, based on past experience, I will end up owing substantial taxes. Will I be stuck with paying the penalty for underpayment of taxes as well?

The rollover/transfer to the traditional IRA and the conversion to a Roth won't occur in 2000. Therefore, when you finally do incur a taxable event in 2001, you may want to see if you must make a quarterly estimated income tax withholding payment to the IRS. If you fail to do so in the quarter the conversion takes place, you might end up owing a penalty for underwithholding when you file your taxes for the year.

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