IRA and 2010 Roth IRA conversion

[DespotInExile]

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Assume a person rolls a 401k into a traditional IRA then converts to a roth IRA.

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This would be a terrible move. Taxes would be due on 100% of the money, since the 401k contributions were pre-tax.

The 2010 conversion is a good idea largely for high earners who are barred from participating in a Roth directly, and who are converting non-deductible IRA money.

For lower earners, the better path to Roth is simply to make your Roth contributions as you go along.

To be more precise, for lower wage earners, you should:

1. Fund your 401k to the level where you have maxxed out any company match.

2. Fund your Roth IRA

3. Fund the remainder of your 401k up until the 15k cap.

[prohornblower]

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When you leave a job, you typically have 60 days to declare what to do with your 401(k). Typically, people do a rollover to a Traditional IRA. It is similar to the 401(k), in that it is tax-deferred.

From there, you can convert it to a Roth at any time (at which point you will pay taxes on the amount the following April). You can only convert it to a Roth IF you do not meet the maximum Adjusted Gross Income amount.

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Assume a person rolls a 401k into a traditional IRA then converts to a roth IRA. I'm assuming taxes would be due on just the investment income when the person converts from the traditional to the Roth, right? As you mentioned they must also be below the MAGI requirement.



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Converting a 401(k) (tax-deferred) to a rollover IRA (tax-deferred) to a Roth IRA (post-tax) would require you ot pay taxes on teh entire amount. Contributions, and earnings.

[LondonBroil]

I have a little over 30k in my 401k at work and am planning on leaving in a little over a year (should have around 40k by then). If I want to convert that to a traditional IRA, then combine it with my existing Roth IRA, I'd have to pay taxes on the entire $40k?

Let's say I'm in the 25% tax bracket. Couldn't I convert $30k of it over, then use the other $10k to pay the taxes that will be due on it?

It seems like it would be impossible to roll over a large 401k balance because of the taxes due the following April. Can you roll it over in chunks, e.g. $20k one year, $20k the next?

[jively]

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When you leave a job, you typically have 60 days to declare what to do with your 401(k). Typically, people do a rollover to a Traditional IRA.

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This is incorrect. After you leave your job, you typically can rollover your 401(k) whenever you want - in the first 60 days, in the first year, 5 years later, 20 years later, or whatever. If your balance is really small, you may be required to roll it over somewhere.

If you do a custodian-to-custodian transfer there is never a problem. However, if your 401(k) provider makes a check payable directly to you, you have only 60 days to deposit it into an IRA for it not to be taxable. You may have been thinking of that 60-day period.

-Tom

[prohornblower]

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I have a little over 30k in my 401k at work and am planning on leaving in a little over a year (should have around 40k by then). If I want to convert that to a traditional IRA, then combine it with my existing Roth IRA, I'd have to pay taxes on the entire $40k?

Let's say I'm in the 25% tax bracket. Couldn't I convert $30k of it over, then use the other $10k to pay the taxes that will be due on it?

It seems like it would be impossible to roll over a large 401k balance because of the taxes due the following April. Can you roll it over in chunks, e.g. $20k one year, $20k the next?

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I don't think you can convert 30k, and keep 10k to pay the taxes. I'm not positive, though. You may be able to. If you already have 10k worht of CONTRIBUTIONS in your existing Roth, you can pull those out at any time for any reason to use to pay the taxes on the 40k.

Also, as far as I know, yes, you can convert 20k one year, and 20k the next. I think that is totally legal. You will be paying more in taxes on the extra years worth of earnings on your 20K though, which I guess would be another 3-5 hundred bucks.