| Author |
Message |
Tony
Guest
|
 Posted:
Mon Oct 31, 2005 4:49 pm Post subject:
Taxes on moving 401K in Roth |
|
|
Right now I have two 401K plans, one from my past and
another from my present employer.
Both plans are with large financial institutions and involve
mutual funds that are, to say it and still remain polite,
not particularly exciting.
I find it impossible to get through company/financial
institutions' bureaucracy and make them understand that I
would rather not participate in, IMO, poor investing
opportunities that they oblige me to participate in.
What are the conditions for moving these to my ROTH account?
My Fidelity advisor (I have 401K from one employer with
them) told me I would be heavily taxed if I recharacterize
that 401K in Roth.
Apparently, you have to live with mutual funds in your 401K
for at least 2 years, before you can move it to Roth IRA
without a huge tax penalty.
Can anybody, please, provide details/advice on what are the
real requirements/gotchas of moving 401K to Roth?
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<< and does NOT constitute legal OR professional advice. >>
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Herb Smith
Guest
|
| Posted:
Wed Nov 02, 2005 5:00 pm Post subject:
Re: Taxes on moving 401K in Roth |
|
|
Tony wrote:
| Quote: | Right now I have two 401K plans, one from my past and
another from my present employer.
Both plans are with large financial institutions and involve
mutual funds that are, to say it and still remain polite,
not particularly exciting.
I find it impossible to get through company/financial
institutions' bureaucracy and make them understand that I
would rather not participate in, IMO, poor investing
opportunities that they oblige me to participate in.
What are the conditions for moving these to my ROTH account?
|
The 401K plan from your PREVIOUS employer can be rolled over
(or preferably direct transferred) to a Traditional IRA at a
custodian of your choice (Fidelity, Vanguard, etc). That
traditional IRA can then be CONVERTED to a Roth IRA, after
payment of ordinary income taxes on the amount withdrawn.
I doubt that you can do anything with your current 401K
plan, other than to reallocate the funds into mutual funds
more to your liking (from the choices available). Also, you
can decline to participate/contribute further, but the funds
in the account are likely there until you terminate
employment with that employer. Withdrawals from active
retirement accounts are usually limited to "hardship"
reasons, and specifically banned from being rolled over to
an IRA.
| Quote: | My Fidelity advisor (I have 401K from one employer with
them) told me I would be heavily taxed if I recharacterize
that 401K in Roth.
|
To go from a 401K plan to a Roth IRA is a TWO-STEP process
(see above), one of which involves paying ordinary income
tax on the amount converted. No way around it.
| Quote: | Apparently, you have to live with mutual funds in your 401K
for at least 2 years, before you can move it to Roth IRA
without a huge tax penalty.
|
Huh? Did your advisor tell you what part of the Tax Code
says that?
| Quote: | Can anybody, please, provide details/advice on what are the
real requirements/gotchas of moving 401K to Roth?
|
You might try reading IRS Pubs 590 and 575 for specifics of
conversion.
<< ======================================================= >>
<< The foregoing is intended for educational purposes only >>
<< and does NOT constitute legal OR professional advice. >>
<< >>
<< The Charter and the Guidelines for submitting >>
<< messages to this newsgroup are at www.asktax.org. >>
<< Copyright (2005) - All rights reserved. >>
<< ======================================================= >> |
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Paul A. Thomas
Guest
|
| Posted:
Wed Nov 02, 2005 5:00 pm Post subject:
Re: Taxes on moving 401K in Roth |
|
|
"Tony" <tonkoj@gmail.com> wrote
| Quote: | Right now I have two 401K plans, one from my past and
another from my present employer.
Both plans are with large financial institutions and involve
mutual funds that are, to say it and still remain polite,
not particularly exciting.
I find it impossible to get through company/financial
institutions' bureaucracy and make them understand that I
would rather not participate in, IMO, poor investing
opportunities that they oblige me to participate in.
What are the conditions for moving these to my ROTH account?
My Fidelity advisor (I have 401K from one employer with
them) told me I would be heavily taxed if I recharacterize
that 401K in Roth.
Apparently, you have to live with mutual funds in your 401K
for at least 2 years, before you can move it to Roth IRA
without a huge tax penalty.
Can anybody, please, provide details/advice on what are the
real requirements/gotchas of moving 401K to Roth?
|
When the Plan documents allow you to take a distribution,
you can *first* roll or transfer that to a "rollover" IRA
and from that IRA to a ROTH. It's a no-brainer for the plan
with the former employer, so ask when the earliest is that
the funds can be disbursed.
As far as your current employer, I just don't see that
happening. Again, ask if there are Plan provisions that
prohibit withdrawal while you are still employed. If they
do not exist, discuss the plan investment options with the
Plan Administrator.
If there is a "two year" rule, it is with your Plan and not
part of federal tax law. It's probably a "plan penalty"
similar to a penalty on early withdrawal of savings (like
cashing in a CD early). There also may be plan rules that
require the investments to remain for a two year period
after termination from the plan.
--
Paul A. Thomas, CPA
Athens, Georgia
paulthomascpapc@bellsouth.net
<< ======================================================= >>
<< The foregoing is intended for educational purposes only >>
<< and does NOT constitute legal OR professional advice. >>
<< >>
<< The Charter and the Guidelines for submitting >>
<< messages to this newsgroup are at www.asktax.org. >>
<< Copyright (2005) - All rights reserved. >>
<< ======================================================= >>
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Phil Marti
Guest
|
| Posted:
Wed Nov 02, 2005 5:00 pm Post subject:
Re: Taxes on moving 401K in Roth |
|
|
"Tony" <tonkoj@gmail.com> wrote:
| Quote: | Right now I have two 401K plans, one from my past and
another from my present employer.
|
For starters, any options you have with the current
employer's plan are dictated by that plan. You may choose
not to contribute, but you probably cannot remove the money
that's already there.
<snip>
| Quote: | What are the conditions for moving these to my ROTH account?
|
1. Do a direct transfer of the old one from the plan to a
traditional IRA. (You can't go directly from 401(k) to
Roth.)
2. "Convert" from the traditional to Roth. Your Roth
custodian is the best place to start. They'll have all the
forms you need.
Step one is tax-free. Step two results in taxable income in
the amount converted. Details are in IRS Publications 575
and 590.
--
Phil Marti
Clarksburg, MD
<< ======================================================= >>
<< The foregoing is intended for educational purposes only >>
<< and does NOT constitute legal OR professional advice. >>
<< >>
<< The Charter and the Guidelines for submitting >>
<< messages to this newsgroup are at www.asktax.org. >>
<< Copyright (2005) - All rights reserved. >>
<< ======================================================= >> |
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cballard@tyyni.net
Guest
|
| Posted:
Wed Nov 02, 2005 5:00 pm Post subject:
Re: Taxes on moving 401K in Roth |
|
|
Tony wrote:
| Quote: | Right now I have two 401K plans, one from my past and
another from my present employer.
Both plans are with large financial institutions and involve
mutual funds that are, to say it and still remain polite,
not particularly exciting.
I find it impossible to get through company/financial
institutions' bureaucracy and make them understand that I
would rather not participate in, IMO, poor investing
opportunities that they oblige me to participate in.
What are the conditions for moving these to my ROTH account?
My Fidelity advisor (I have 401K from one employer with
them) told me I would be heavily taxed if I recharacterize
that 401K in Roth.
Apparently, you have to live with mutual funds in your 401K
for at least 2 years, before you can move it to Roth IRA
without a huge tax penalty.
Can anybody, please, provide details/advice on what are the
real requirements/gotchas of moving 401K to Roth?
|
Don't confuse the tax rules with the other legal rules.
You probably can roll over the 401(k) from your previous
employer to an IRA, although you'd have to take a look at
the 401(k) plan to see whether it allows for rollovers after
an employment separation. If it does, you can set up the
IRA wherever you like, and be as agressive or conservative
as you like with the investments.
Note that you will have to roll the 401(k) over into what is
called a "traditional" IRA. You cannot do a rollover from a
401(k) directly into a Roth IRA (at least not yet). Once
the funds are in the IRA, you might be able to convert the
IRA into a Roth IRA, but you'd have to meet the income
restrictions for doing the conversion. If you do convert,
you will be treated as withdrawing the entire amount from
your IRA and then recontributing it to a Roth IRA, which
means paying taxes on everything in the IRA account.
The 401(k) at your existing employer is probably more
difficult. Some employers allow for "in service
distributions", which would allow you to transfer your
401(k) to an IRA, but that is relatively rare. Generally,
your funds are stuck inthe 401(k) until you leave the
employer or hit retirement age. It'll all be spelled out in
your employer's 401(k) plan document. Get a copy from your
HR person.
--Chris Ballard
<< ======================================================= >>
<< The foregoing is intended for educational purposes only >>
<< and does NOT constitute legal OR professional advice. >>
<< >>
<< The Charter and the Guidelines for submitting >>
<< messages to this newsgroup are at www.asktax.org. >>
<< Copyright (2005) - All rights reserved. >>
<< ======================================================= >> |
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Guest
|
| Posted:
Wed Nov 02, 2005 5:00 pm Post subject:
Re: Taxes on moving 401K in Roth |
|
|
Tony" <tonkoj@gmail.com> wrote:
| Quote: | Right now I have two 401K plans, one from my past and
another from my present employer.
Both plans are with large financial institutions and involve
mutual funds that are, to say it and still remain polite,
not particularly exciting.
I find it impossible to get through company/financial
institutions' bureaucracy and make them understand that I
would rather not participate in, IMO, poor investing
opportunities that they oblige me to participate in.
What are the conditions for moving these to my ROTH account?
My Fidelity advisor (I have 401K from one employer with
them) told me I would be heavily taxed if I recharacterize
that 401K in Roth.
Apparently, you have to live with mutual funds in your 401K
for at least 2 years, before you can move it to Roth IRA
without a huge tax penalty.
Can anybody, please, provide details/advice on what are the
real requirements/gotchas of moving 401K to Roth?
|
You'll need to check the IRA website for details, but my
understanding is that:
1) you can not transfer the 401K from your existing employee.
You either use their plan or you don't.
2) you can transfer your 401K from your previous employer to
an IRA, (not a Roth IRA);
3) Once in an IRA, then you can transfer the IRA to a ROTH
IRA. You'll have to pay the deferred taxes at that time,
but no penalty.
4) You can not transfer directly from a 401K to a Roth IRA.
You have to go through a regular IRA first.
5) Even if you have a 401K plan with your current employer,
you can still contribute the maximum amount to a ROTH ira.
Do a search on goggle for the keywords: 401K to IRA
and you'll find a ton of advice.
Or search the IRS site for "rollover"
http://www.irs.gov/faqs/faq17-2.html
http://www.irs.gov/taxtopics/tc413.html
See Pub 575
http://www.irs.gov/publications/p575/index.html
<< ======================================================= >>
<< The foregoing is intended for educational purposes only >>
<< and does NOT constitute legal OR professional advice. >>
<< >>
<< The Charter and the Guidelines for submitting >>
<< messages to this newsgroup are at www.asktax.org. >>
<< Copyright (2005) - All rights reserved. >>
<< ======================================================= >> |
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joetaxpayer
Guest
|
| Posted:
Wed Nov 02, 2005 11:17 pm Post subject:
Re: Taxes on moving 401K in Roth |
|
|
Tony wrote:
| Quote: | Right now I have two 401K plans, one from my past and
another from my present employer.
Both plans are with large financial institutions and involve
mutual funds that are, to say it and still remain polite,
not particularly exciting.
I find it impossible to get through company/financial
institutions' bureaucracy and make them understand that I
would rather not participate in, IMO, poor investing
opportunities that they oblige me to participate in.
What are the conditions for moving these to my ROTH account?
My Fidelity advisor (I have 401K from one employer with
them) told me I would be heavily taxed if I recharacterize
that 401K in Roth.
Apparently, you have to live with mutual funds in your 401K
for at least 2 years, before you can move it to Roth IRA
without a huge tax penalty.
Can anybody, please, provide details/advice on what are the
real requirements/gotchas of moving 401K to Roth?
|
You may not move a 401(k) to a Roth, period.
What you must do, is first rollover the 401(k) to a rollover
IRA. Do a direct transfer, don't let them write you a check.
If they insist on sending you the check, make sure the check
is made payable to the new custodian (e.g pay to Charles
Schwab, custodian of IRA account of JoeTaxpayer).
What I described is a non-taxable event. I don't know what
they meant by 2 years, never heard of such a thing. Next,
you may, at any time, even the day after the funds clear,
transfer any or all of the IRA to a Roth IRA. But, this
transaction is taxable at regular income rates. So you first
want to determine your bracket. Say you are in the 25%
bracket. You may want to convert enough to just stay in that
bracket, but no more. You can transfer each year with this
strategy. Depending how much money you are talking, you
would send yourself into a higher bracket by doing this all
at once. (There is $100,000 MAGI limit as well. If your
adjusted gross income is over 100K, not including the
converted money, you cannot make the conversion. And must
reverse it if you already did it).
Good luck.
JOE
<< ======================================================= >>
<< The foregoing is intended for educational purposes only >>
<< and does NOT constitute legal OR professional advice. >>
<< >>
<< The Charter and the Guidelines for submitting >>
<< messages to this newsgroup are at www.asktax.org. >>
<< Copyright (2005) - All rights reserved. >>
<< ======================================================= >> |
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Phil Marti
Guest
|
| Posted:
Thu Nov 03, 2005 9:00 am Post subject:
Re: Taxes on moving 401K in Roth |
|
|
<cballard@tyyni.net> wrote:
| Quote: | You probably can roll over the 401(k) from your previous
employer to an IRA, although you'd have to take a look at
the 401(k) plan to see whether it allows for rollovers after
an employment separation.
|
It must.
--
Phil Marti
Clarksburg, MD
<< ======================================================= >>
<< The foregoing is intended for educational purposes only >>
<< and does NOT constitute legal OR professional advice. >>
<< >>
<< The Charter and the Guidelines for submitting >>
<< messages to this newsgroup are at www.asktax.org. >>
<< Copyright (2005) - All rights reserved. >>
<< ======================================================= >> |
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Rich Carreiro
Guest
|
| Posted:
Thu Nov 03, 2005 9:00 am Post subject:
Re: Taxes on moving 401K in Roth |
|
|
"Tony" <tonkoj@gmail.com> writes:
| Quote: | Right now I have two 401K plans, one from my past and
another from my present employer.
|
[snip]
| Quote: | What are the conditions for moving these to my ROTH account?
|
The one in your present employer's plan -- no can do. Can't
move it to a traditional IRA, either.
The one in the past employer's plan -- you can only do it if
(essentially) your gross income (not counting the transfer
itself) is under $100,000. And the actual transaction is to
roll the 401(k) into an trad IRA (which you can do
regardless of income, and which has no tax consequences) and
then coverting the monies in that trad IRA into a Roth IRA
(that's where the $100,000 income limitation comes in and
where tax is imposed).
| Quote: | My Fidelity advisor (I have 401K from one employer with
them) told me I would be heavily taxed if I recharacterize
that 401K in Roth.
|
I don't know about "heavily", but converting a trad IRA to a
Roth IRA means the transferred monies show up as income on
your return and you have to pay federal (and state, and
local) income tax on it (though not the 10% penalty tax).
| Quote: | Apparently, you have to live with mutual funds in your 401K
for at least 2 years, before you can move it to Roth IRA
without a huge tax penalty.
|
Who told you that? It's totally wrong.
| Quote: | Can anybody, please, provide details/advice on what are the
real requirements/gotchas of moving 401K to Roth?
|
To summarize:
* You almost never (perhaps never) can roll money in your
current employer's 401(k) plan into an IRA.
* No one can directly move a 401(k) to a Roth IRA. If the
process can happen at all, the sequence is 401(k) to trad
IRA to Roth IRA.
* To be able to convert a trad IRA to a Roth IRA requires
that your gross income is less than $100,000.
* Monies converted from a trad IRA to a Roth IRA are taxed
as ordinary income.
* What's in the 401(k) is irrelevant.
--
Rich Carreiro rlcarr@animato.arlington.ma.us
<< ======================================================= >>
<< The foregoing is intended for educational purposes only >>
<< and does NOT constitute legal OR professional advice. >>
<< >>
<< The Charter and the Guidelines for submitting >>
<< messages to this newsgroup are at www.asktax.org. >>
<< Copyright (2005) - All rights reserved. >>
<< ======================================================= >> |
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Tony
Guest
|
| Posted:
Sun Nov 06, 2005 11:30 pm Post subject:
Re: Taxes on moving 401K in Roth |
|
|
Thank you and to all the people helping to clarify this.
Apparently, my Fidelity advisor wanted to keep my past
employer's SEP 401K 'under his hood' for a while longer. I'm
not sure what does he has to gain from my continuing to own
some Fidelity's mutual funds.
Thus he claimed that I'll have to wait 2 years before I can
roll that SEP 401K to Traditional IRA and then to Roth IRA,
otherwise I'll pay 20% taxes on recharacterized amount.
This confused me and was the primary reason why I posted
this question.
<< ======================================================= >>
<< The foregoing is intended for educational purposes only >>
<< and does NOT constitute legal OR professional advice. >>
<< >>
<< The Charter and the Guidelines for submitting >>
<< messages to this newsgroup are at www.asktax.org. >>
<< Copyright (2005) - All rights reserved. >>
<< ======================================================= >> |
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D. Stussy
Guest
|
| Posted:
Wed Nov 09, 2005 9:00 am Post subject:
Re: Taxes on moving 401K in Roth |
|
|
Tony wrote:
| Quote: | Right now I have two 401K plans, one from my past and
another from my present employer.
Both plans are with large financial institutions and involve
mutual funds that are, to say it and still remain polite,
not particularly exciting.
I find it impossible to get through company/financial
institutions' bureaucracy and make them understand that I
would rather not participate in, IMO, poor investing
opportunities that they oblige me to participate in.
What are the conditions for moving these to my ROTH account?
My Fidelity advisor (I have 401K from one employer with
them) told me I would be heavily taxed if I recharacterize
that 401K in Roth.
Apparently, you have to live with mutual funds in your 401K
for at least 2 years, before you can move it to Roth IRA
without a huge tax penalty.
Can anybody, please, provide details/advice on what are the
real requirements/gotchas of moving 401K to Roth?
|
It is NOT a one-step process.
First, it must be rolled over into a traditional IRA. No
tax there.
Then the IRA needs to be converted. That's where it is
taxed.
Optional: Lastly, merge the Roth accounts.
<< ======================================================= >>
<< The foregoing is intended for educational purposes only >>
<< and does NOT constitute legal OR professional advice. >>
<< >>
<< The Charter and the Guidelines for submitting >>
<< messages to this newsgroup are at www.asktax.org. >>
<< Copyright (2005) - All rights reserved. >>
<< ======================================================= >> |
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