Home     Forum     401k     401k Rollovers
    Register   Login   Members   Search   FAQs     Recent Posts    




IRA rollovers and taxes

Reply to topic
Money Talk > Taxes

Author Thread
Stock Mama
Full Member


Cash: $ 13.80

Posts: 68
Joined: 06 Apr 2006

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
 View user's profile Send private message Visit poster's website
coaster
Senior Advisor


Cash: $ 1626.30

Posts: 7990
Joined: 11 Oct 2005
Location: Wisconsin
 Reply with quote  

You can have both, but I don't know what the advantage would be. Certainly seems like you'd be equivocating on your tax plans. And contributions would be the sum. This disadvantage of having two plans would be two custodial fees. And splitting your resources. I have two online brokerage accounts and I'm always juggling trades having to consider which account has enough funds available, and sometimes neither so I have to move funds. Which of course you couldn't do between two IRAs of different types.

Yes, you would pay tax for the year in which you convert. ie if you convert this year, 2006, tax is due April, 2007.

Oh....I did think of one advantage to having two accounts. You can use your contributions to adjust your income tax. For example, if you need extra deductions you make your contributions to the traditional account, and if not, to the Roth account. Smile

~Tim~
Post Tue May 02, 2006 2:59 am
 View user's profile Send private message
efflandt
Senior Member


Cash: $ 80.45

Posts: 401
Joined: 25 Apr 2005
Location: Elgin, IL USA
 Reply with quote  

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
 View user's profile Send private message
coaster
Senior Advisor


Cash: $ 1626.30

Posts: 7990
Joined: 11 Oct 2005
Location: Wisconsin
 Reply with quote  

The amount of deduction allowed when covered by an employee plan depends on "modified adjusted gross income." The IRS Pub linked to above has a table.

quote:
For 2006, if you are covered by a retirement plan at work, your IRA deduction will not be reduced (phased out) unless your modified AGI is:

More than $50,000 but less than $60,000 for a single individual (or head of household),

More than $75,000 but less than $85,000 for a married couple filing a joint return (or a qualifying widow(er)), or

Less than $10,000 for a married individual filing a separate return.

You have to do a worksheet to figure modified AGI.

This is a case where TurboTax comes in handy. Wink

~Tim~
Post Wed May 03, 2006 2:15 am
 View user's profile Send private message
bong12187
Preferred Member


Cash: $ 24.50

Posts: 120
Joined: 31 Jul 2005

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
 View user's profile Send private message
Stock Mama
Full Member


Cash: $ 13.80

Posts: 68
Joined: 06 Apr 2006

 Reply with quote  

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
 View user's profile Send private message Visit poster's website

Reply to topic
Forum Jump:
Jump to:  
  Display posts from previous:      





Money Talk © 2003-2016