Four Questions to Ask About 401k to IRA Rollovers

[Common Sense Party]

Full article at: http://finance.yahoo.com/news/four-questions-ask-401-k-113800209.html

* Do You Need to Do a Rollover at All? You don't have to do a rollover. You can leave your money in your current employer's plan. If your present defined-contribution plan offers several low-cost options that are performing well, you may not have to make a move.


* Have You Vetted a New Plan or IRA? No matter which financial services firm you choose, they will want to sell you products that will have management expenses and possibly commissions. You can, of course, set up a "self-directed" IRA that allows you to trade securities, but you have to ask yourself if that's a good idea. Most people don't do too well with individual trades after transaction costs are deducted.


* Should You Cash Out? This is a tremendous temptation that far too many retirement savers take. If you cash out before age 59 1/2, you'll be subject to a 10-percent federal early-withdrawal penalty plus income taxes, so Uncle Sam could be taking up to 40 percent of your withdrawal. Employers often withhold 20 percent of the cash-out just to pay taxes. So there's no way you can come out ahead on these "lump-sum distributions."


* Are You Choosing the Best Rollover Strategy? Generally, the worst move is to go from a low-cost, diversified 401(k) to a high-fee, commissioned IRA. Keep in mind that you are trying to preserve your nest egg while seeking income and growth to beat inflation.

Another question to ask might be, Do you expect any creditors to come after you to get some of your money? Depending on your state, the 401(k) might be tougher for creditors to seize than would an IRA.

I usually think the IRA will be better, just for the wide variety of investments and more flexible distribution methods it offers. But, as this article shows, it's not ALWAYS the best choice for EVERYONE.

[SheilaT]

1. Thanks.

I expect to be leaving my job in a few months, and I'll need to think about rolling over my 403b. I actually will probably find a way to convert it to my Roth IRA, especially as there is not going to be very much money in the 403b since I will have held this job for only about 4 years.

[lastlib]

2. I think you'll likely take a huge hit on taxes.

[SheilaT]

3. Probably not. My 403b

is going to be maybe fifteen grand. But I do have a financial adviser who will know what makes sense.

[A HERETIC I AM]

4. The conversion to a Roth can actually be a good idea.

You are probably aware that doing so is a taxable event, BUT....
Once you have paid those taxes, the money in the Roth will never be taxed again.

Ever.


All growth is not taxed and (as you are probably aware) withdrawals (Distributions, more properly) aren't taxed either.

One thing I learned was that if it is possible to pay the tax liability with other funds, say savings, for instance, then the entire amount - in your case, the $15K, goes into the Roth.

Your FA can easily run a tax analysis for you to show how much the taxes will be. If you have that much in another account, he might suggest using those funds to cover the tax liability (I would if I was still licensed and you were my client).

The Roth has several benefits a traditional IRA does not have. You may already know all this, so I won't bore you. If not, just ask your FA.

[SheilaT]

5. No, you are not boring me. I more or less know what you've said,

but it never hurts to hear it again. Plus, I'm sure others who read here may not comment themselves, but will take away the information given.

If I'm not confused, it seems to me as though the best thing about a Roth is that there is no need to start taking money out at age 70 and a half. It can be used as sort of a back up (at least this is how I think of it) to my other sources of income.

Anyway, the amount involved is relatively small. Do you know if it could be converted a bit at a time to help reduce the taxes? I'm guessing the entire amount would be taxed as ordinary income, and depending on what that sum does to my total income for the year would determine how much taxes involved, yes? Or, depending of course on any other income, it may not make a difference so perhaps is best to convert it all at once.

I do feel like I have an excellent FA. A year or so ago he left Merrill-Lynch and joined an independent group of FAs, and has re-jiggered how my money is invested. I'm doing better financially, and feel far more confident about my long term financial future. So much so, that I'm going to retire from my part time job in April. Yeah!

[A HERETIC I AM]

6. Correct - there are no RMD's on Roth IRA's

Last edited Sun Jan 12, 2014, 10:18 PM - Edit history (1)

RMD = Required Minimum Distribution

You do not have to take any money from it at all and you can contribute to it as long as you have earned income.

The RMD rules do apply to a beneficiary however, in a similar fashion to traditional IRA's.

IRS Publication 590 has the details.

The section on Roth IRA's begins on page 62;

http://www.irs.gov/pub/irs-pdf/p590.pdf

"Do you know if it could be converted a bit at a time to help reduce the taxes? I'm guessing the entire amount would be taxed as ordinary income, and depending on what that sum does to my total income for the year would determine how much taxes involved, yes? Or, depending of course on any other income, it may not make a difference so perhaps is best to convert it all at once."

The answer to the question beginning with the second sentence is yes, absolutely. Traditional IRA's, 401(k)'s and 403(b)'s all contain money that has yet to be taxed, basically. It's taxed when you take a distribution and yes, it's taxed as ordinary income for the year in which you take it out. If your regular, earned income is right under the next tax bracket and a distribution will put your AGI into the next higher bracket, then yes, you are going to pay a larger share of it in taxes. If however your income is such that a distribution won't move you up another bracket, then the rate will be the same as what you are paying on your wages. The answer to the question in the first sentence therefore is "it depends". It depends on your other income.

If you aren't sure what those brackets are/were for 2013, here's the IRS page for you to check them out.

If you are older than 59 1/2 you can take distributions from your 403(b) as you wish. There is no rule that I can find that prohibits you from rolling those into a Roth. So, yes you could do it over the course of a couple years, as far as what I gather from reading Pub 590 and what I recall.

I would rather not give you a definitive yay or nay here, so please ask your FA. It has been a while since I dealt with this stuff on a daily basis and it's apparent I'm a bit rusty!

If I remember correctly, back in 2008-09, the IRS allowed monies from Traditional IRA's and similar accounts to be converted to a Roth with no limitations. They also allowed those conversions to be done over the course of 2 years. I do not know whether or not that has expired.

[SheilaT]

7. You've been immensely helpful.

I've printed out page four of the IRS document for my taxable income since I'm an unmarried individual.

What I am also befuddled about is how much earned income, or unearned income, can I have before I have to start paying taxes? Would that amount basically be the standard deduction?