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IRA rollovers and taxes

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Stock Mama
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IRA rollovers and taxes  Reply with quote  

Here's what I've got: I closed out a 403(b) account with a firm because their mutual funds haven't done diddly-squat -- literally. After the past market crashes, my fund contains about the same amount of of money that I originally put into it (which wasn't much).

I've moved the money to a traditional IRA at Scottrade so that I can manage it myself and choose my own investments. If it loses money again, I can only blame myself.

Because the money was taken out pre-tax, Scottrade had to put it into a traditional IRA. I would rather, however, have the money in a Roth IRA, so that I can grow it without taxes on the gains, and have a lighter tax burden on retirement.

So -- to make sure I understand this correctly -- if I roll it over into a Roth IRA, I would have to pay taxes on that money the year that I do so? Can someone explain in very small words how that would work on next year's taxes?

Or -- would there be any advantage to keeping it in the traditional IRA and also have a Roth?

I assume that the total yearly contribution I can take on taxes would be on the two combined, right?

I'd rather have it all in one place to manage, but I'll listen to other viewpoints, too.
Post Tue May 02, 2006 2:53 am
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efflandt
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You can convert IRA money to a Roth IRA account, but not directly from 401(k), 403(b), or other employee plan (which has to run through traditional or rollover IRA before it could be converted). If IRA and Roth IRA are at the same broker, converting cash, funds, or equities to the Roth may be as simple as a phone call.

You would owe tax for any amount converted to a Roth IRA. If that could push you into a higher marginal tax bracket, you might want to do it gradually over a number of years. Conversion goes on whatever 1040 as an IRA distribution and counts as income, but also properly fill out form 8606 so they no there is no early distribution penalty.

CAUTION: By default, they withhold tax from the conversion unless you specifically tell them not to. The withholding could be considered an early IRA distribution subject to 10% penalty, besides the tax. So you should make sure that you have any tax liability covered (W-4 adjustment or estimated tax payments if necessary). And make sure the trustee knows NOT to withhold from the conversion.

There is NO tax deduction for Roth IRA contributions, but never any further tax on that or its gains, if qualified.

Whether traditional IRA contributions are deductable (if at all) depends whether any employer during the year had an employee retirement plan (per W-2 checkbox), regardless of whether you participated.

For details see http://www.irs.gov/publications/p590/index.html
Post Wed May 03, 2006 1:11 am
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bong12187
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Re: IRA rollovers and taxes  Reply with quote  

quote:
Originally posted by Stock Mama
Here's what I've got: I closed out a 403(b) account with a firm because their mutual funds haven't done diddly-squat -- literally. After the past market crashes, my fund contains about the same amount of of money that I originally put into it (which wasn't much).

I've moved the money to a traditional IRA at Scottrade so that I can manage it myself and choose my own investments. If it loses money again, I can only blame myself.

Because the money was taken out pre-tax, Scottrade had to put it into a traditional IRA. I would rather, however, have the money in a Roth IRA, so that I can grow it without taxes on the gains, and have a lighter tax burden on retirement.

So -- to make sure I understand this correctly -- if I roll it over into a Roth IRA, I would have to pay taxes on that money the year that I do so? Can someone explain in very small words how that would work on next year's taxes?

Or -- would there be any advantage to keeping it in the traditional IRA and also have a Roth?

I assume that the total yearly contribution I can take on taxes would be on the two combined, right?

I'd rather have it all in one place to manage, but I'll listen to other viewpoints, too.

Just like what Efflant said, you can't convert 403b or 401k straight to ROTH IRA. You have to go through traditional IRA first then to ROTH IRA. They all talked about paying taxes on it but there are really two taxes that we are talking about here. First you will get hit with the penalty tax which is about 10%. Then whatever is left that you are trying to rollover from traditional IRA to ROTH, will be taxed according to your tax bracket. Majority of the time, they can go as high as 36%. Whatever is left after that is what you'll have for ROTH investment.
Post Fri May 05, 2006 6:27 am
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Stock Mama
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Thanks, all. That's pretty much what I thought, but I wanted to get it checked out and give it some thought. The small amount of money we're talking isn't going to have a huge impact on taxes this year, so that's not a concern. It's sitting in a traditional IRA right now (thanks to the nice guy at Scottrade who made it all happen when I realize online that I probably wasn't doing it right and took the whole mess into the local office), and there's a Roth account waiting to receive it.
Post Sat May 06, 2006 4:37 am
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