i'm thinking about leaving my job and wanted to know a little more about this. i could search google, but i feel theres a lot of misinformation on there that would be hard to sort out, and that i can more easily sort out any misinformation provided here.

Can i roll it over into my new 401k plan, or does it have to go into an IRA? are there any typical penalties?

5/22/2008 12:59:04 PM

You could just leave it alone.

5/22/2008 1:09:14 PM

If you're going to another job, you can roll it over into your new plan. There are no penalties and it's all tax free. You will be issued a 1099-R that explains that it's a non-taxable event.

If the 401(k) is over a certain amount (and I *think* it's around $5000, though could be as low as $1000) you can leave it at your former employer if you desire.

5/22/2008 2:41:17 PM

yes, if it is over 5K
yes
no, not for a direct rollover

5/22/2008 2:43:03 PM

Wouldn't it be better to roll it over into a traditional IRA?

401(k) gives you less options to invest in and has higher operating expenses in most cases

[Edited on May 22, 2008 at 2:52 PM. Reason : ]

5/22/2008 2:51:57 PM

Yep, that's what I did with mine.

5/22/2008 3:00:20 PM

^^ same here as well.

5/23/2008 1:44:36 PM

^That's what I did with mine as well. However, I've been thinking of moving it into a roth IRA soon, as so many people recommend it. THe one thing I am not so sure of is, if I convert my regular IRA to a roth IRA, I have to pay taxes now and if I withdraw before my retirement age, I have to pay (income) taxes again on the interest gained + early penalty ? In such a scenario, I am thinking that just leaving it in the regular IRA would be better ??? And another one told me about his calculations which told him that he would have more money saved if it is in regular IRA than if it is in roth IRA because more money gets componded over time and even if I am at a higher tax slab when I retire, regular IRA would have resulted in more accumulation. Is this true?

5/23/2008 4:09:20 PM

I converted mine.

Why are you putting money in an IRA if you plan to withdraw earning from it early for a non qualified expense?

5/23/2008 4:22:43 PM

I am not "planning" to withdraw early. But I don't know the future and circumstances might necessitate a withdrawal before I retire. But just from an investment perspective, which of the following is better:
Investing X (before tax T1) for Y years and then withdrawing at T2 tax rate
or
Investing x (X after tax T1) for Y years and then withdrawing with no tax when my current tax rate is T2 ? Assuming T2 > T1 but not more than say 10% ?

5/23/2008 5:18:13 PM

You're not just talking about a withdrawal. You're talking about a withdrawal of the interest. Do you really think you'll deplete all your other assets + retirement principle so that you need to tap retirement interest you've made?

5/23/2008 8:30:23 PM

I am not 100% sure but you cant convert a traditional IRA to a roth without a taxable event occurring. My guess is that you would be taxed and penalized on the whole amount and would then be limited on the amount you could contribute to a Roth.

5/24/2008 11:51:10 AM

Ok I was wrong. This is from http://www.irs.gov:

Quote :

"Conversion methods. You can convert amounts from a traditional IRA to a Roth IRA in any of the following three ways. Rollover. You can receive a distribution from a traditional IRA and roll it over (contribute it) to a Roth IRA within 60 days after the distribution. "

Here is more:

Quote :

" Allowable conversions. You can withdraw all or part of the assets from a traditional IRA and reinvest them (within 60 days) in a Roth IRA. The amount that you withdraw and timely contribute (convert) to the Roth IRA is called a conversion contribution. If properly (and timely) rolled over, the 10% additional tax on early distributions will not apply. You must roll over into the Roth IRA the same property you received from the traditional IRA. You can roll over part of the withdrawal into a Roth IRA and keep the rest of it. The amount you keep will generally be taxable (except for the part that is a return of nondeductible contributions) and may be subject to the 10% additional tax on early distributions. See When Can You Withdraw or Use Assets, later for more information on distributions from traditional IRAs and Early Distributions, later, for more information on the tax on early distributions. "

It does not talk about your basis in the Roth IRA though. Since its a conversion your basis would be $0 and any interest earned would not grow tax free. Any interest derived from new contributions would grow tax free.

[Edited on May 24, 2008 at 12:00 PM. Reason : tax]

5/24/2008 11:57:31 AM

Quote :

"any interest earned would not grow tax free"

How do you figure?

5/24/2008 12:27:17 PM

Because you are earning the interest on pre-tax dollars, either through a previous 401-K or IRA contribution. The interest would be taxable in a 401K or IRA distribution. It wouldnt make sense for the IRS to allow these conversions if you were earning tax-free interest on pre-tax contributions.

But it is also extremely hard to differentiate what interest was earned on pre-tax and post-tax dollars after the conversion.

5/24/2008 4:22:56 PM

Try here.

http://www.diehards.org/

5/24/2008 4:35:17 PM

It's post tax dollars once you convert it to a roth so the interest should grow tax free.

5/24/2008 4:35:24 PM

Quote :

"THe one thing I am not so sure of is, if I convert my regular IRA to a roth IRA, I have to pay taxes now and if I withdraw before my retirement age, I have to pay (income) taxes again on the interest gained + early penalty ?"

If you convert your regular IRA to a ROTH IRA you will pay taxes on it.

If you withdraw before retirement you pay income taxes plus a HUGE penalty. Take a look at what you may need money for in the next few years (house, car, bitches) and set that aside in a regular IRA or something, and then think about converting the rest into a ROTH. You do NOT want to touch your ROTH until you're retired.

5/24/2008 4:40:54 PM

I think he realizes that and is just pointing out that if he withdraws early from a regular IRA he pays taxes on his pre-tax earnings plus a huge penalty but if he withdraws early from a roth IRA he pays taxes on his post-tax earnings plus a huge penalty.

5/24/2008 4:45:58 PM

How is it post tax dollars after the conversion? You havent paid tax during the conversion. The conversion does not increase basis in the Roth. Lets say you have $150,000 in an IRA that you converted to a Roth IRA. Of that $150,000 lets say that $125,000 is pre-tax contributions and $25,000 is interest. In 10 years you havent made any other contributions to the Roth and it has grown to $225,000. If you take a full distribution how much is subject to income tax and how much to penalty? You are under retirement age.

The original $150,000 is definately subject to income tax and the penalty because its pre-tax dollars and you are under retirement age. The Roth does not shelter you from income tax on this because it was pre-tax dollars. What about the $75,000 earned while in the Roth?

5/24/2008 4:51:16 PM

Quote :

"The original $150,000 is definately subject to income tax"

No it's not. You already paid taxes on this when you converted to a roth.

5/24/2008 4:53:14 PM

Advantages

* If there is money in the Roth IRA due to conversion from a Traditional IRA, the Roth IRA owner may withdraw up to the total of the converted amount, as long as the "seasoning" period has passed on the converted funds (currently, five years).

http://en.wikipedia.org/wiki/Roth_IRA

5/24/2008 4:54:05 PM

Whats the point of converting to the Roth if you are paying income tax on the amount you rolled-over?

5/24/2008 5:06:17 PM

Nevermind, I could see where it might work for some people. I guess alot depends on the amount you are converting and your current income.

5/24/2008 5:10:23 PM

Roth gains are not taxed at all under the present tax code if you wait until retirement age.

5/24/2008 5:25:47 PM

^^ Yeah, that's why I went ahead and converted mine since I expect my income to rise.

5/24/2008 5:46:45 PM

There are only two real reasons to roll to a 401k instead of an IRA.

1) You want to take a loan against the account.

2) There is an institutional fund in your 401k that you could not get in an IRA

The only other reason is certain professions (doctors, lawyers, etc) based upon which state they reside may be better off having money in a 401k rather than an IRA for liability purposes. This is pretty rare these days though.


If you convert from a 401k to a ROTH IRA you pay taxes but no penalty on the amount this year. There are no taxes withheld from the rollover so you have to make them up out of pocket at the end of the year. You do not want to pull out of the IRA to pay the taxes because that will create a tax liability. There is an income limitation this year of ~100-110k I forget the exact amount. In other words if you make $80,000 this year and wish to convert $50,000 you would be ineligible to do so until the income cap comes off in a few years (2010 i believe).

For some people the conversion can be a great option. Say you have a lot of tax deductions this year (starting a business?) or are only working part time due to school, having a baby, etc.

Tax brackets are likely on the rise, but who knows what portion of taxes will come from consumption 30-40 years from now. You want to achieve tax diversification so all of your retirement funds aren't aftertax if we reform the tax code 20 years from now and suddenly there is an 18% tax on all purchased goods. At the same time if you expect to make significantly more money 20 years from now you may be better off accumulating aftertax money now and accumulating pretax money in your later years.

How much will you be drawing from this when you retire? If retirement vehicles will be your only income then a conversion makes less sense than if you will have a large pension/annuity/etc that increases your income.



[Edited on May 25, 2008 at 6:48 PM. Reason : a]

5/25/2008 6:45:07 PM

BTT

I have a different question than what the IRSeriousCat had but I didn't want to start another thread

Here it is:

I just started taking 6% out of every paycheck (pre-tax) for 401k. My company matches up to 6%. I want to purchase my first house within the next two years and have been putting the money I've been saving in a saving account.

I was reading on Fidelity (my 401k provider) that I can rollover my 401k into a Fidelity IRA for not fees. Also, I read that I can withdraw from my IRA with no fees if I use the money as part of a downpayment on my first house.

It seems like a great idea to me that I could save for my first home and have the company match the 6% of my paycheck that I've been contributing. After I purchase my first home (I'll be about 24) I will then use my 401k money to save only retirement.

Is this a good idea to use the IRA money I will have been saving for 2 years to help fund my first house?

[Edited on June 4, 2008 at 7:27 AM. Reason : yo]

6/4/2008 7:25:49 AM

Quote :

"I was reading on Fidelity (my 401k provider) that I can rollover my 401k into a Fidelity IRA for not fees."

That's true assuming you are no longer working there. I'm pretty sure most places do not allow you to roll over while you are still with the company.

6/4/2008 8:17:50 AM