No. of Recommendations: 0
Jim asks:

What would constitute "Income not previously taxed"?
Am I assuming that when doing a rollover from a company 401k to a self
directed ira (I just retired)I might have to pay taxes on the increased value above my and my employer's contributions?
Now ya got me frightened !

Any elective contributions you made to your 401(k) that caused your taxable income to be less than your gross wages, any contribution your employer made to the 401(k) on your behalf, and all earnings within the 401(k) represent money that has never been taxed. If that money is transferred to a traditional IRA, then it will stay untaxed until it is withdrawn from the IRA and used by you in retirement. Then and only then will it be taxed, and the taxes will be paid at the ordinary income tax rates in effect in the year of withdrawal.

Note that you will NOT pay income taxes during the rollover, only when you take and keep the money from the plan or the IRA. A word of caution is in order though. To avoid any complications in that regard, you must arrange for a direct transfer from the plan custodian to the IRA provider. If you elect to take the money yourself with the intention of rolling it to an IRA within 60 days of receipt, then by law the plan administrator must withhold 20% of the amount distributed from the plan. To make a complete rollover, you must then come up with the 20% withheld and add that to the check you send to the IRA. If you don't do that, then come tax time the 20% withheld will be considered a distribution to you. That means you will have to pay income tax on that missing 20% plus a 10% penalty if you're younger than age 55 in the year you left that job. A direct transfer between the plan and the IRA avoids that problem, and 100% of the money in the plan will go into the IRA. Both your plan administrator and the IRA custodian will guide you through the steps to arrange for a direct transfer, so just ask them what you need to do.

Print the post  


The Retirement Investing Board
This is the board for all discussions related to Investing for and during retirement. To keep the board relevant and Foolish to everyone, please avoid making any posts pertaining to political partisanship. Fool on and Retire on!
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.