Rolling over 401k into IRA

[wipedown]

Advertisement - Members don't see this ad

I currently have a hospital 401k-type plan that has 2 options upon leaving the hospital and would like to deposit the funds into a Roth IRA.

1) The funds can be withdrawn and taxed as normal income (then used to fund a Roth IRA).
2) The funds can be rolled into a Traditional IRA (then converted to a Roth IRA).

In scenario #2, when converted to a Roth IRA, is the Traditional IRA taxed as normal income?

If so, in comparing scenarios #1 and #2, is the net amount that goes into the Roth IRA exactly the same? Or is there some advantage in "rolling over"?

Thanks for any help!

 

[billermo]

I currently have a hospital 401k-type plan that has 2 options upon leaving the hospital and would like to deposit the funds into a Roth IRA.

1) The funds can be withdrawn and taxed as normal income (then used to fund a Roth IRA).
2) The funds can be rolled into a Traditional IRA (then converted to a Roth IRA).

In scenario #2, when converted to a Roth IRA, is the Traditional IRA taxed as normal income?

If so, in comparing scenarios #1 and #2, is the net amount that goes into the Roth IRA exactly the same? Or is there some advantage in "rolling over"?

Thanks for any help!

I chose option #2 when I left my job for school. You definitely want to move it. Even if your employer let's you keep your money in their 401K, they can change plans, etc. that could affect your money. So the smart thing to do is move it to traditional IRA, preferebly with the same institution to avoid any fees. This might depend on the dollar amount. When I did this last year, we did not have the option to roll it directly into a roth IRA. The rules may have changed this year. I will convert my traditional IRA to a Roth IRA this year. The reason I waited is for tax purposes. Since I am now a full time student, it's advantageous to convert my traditional IRA to a Roth IRA. The conversion will be taxed like income tax, but since I'm a full time student with no income, my tax rate is extremely low (if any). In fact, my plan is to convert about $6,000 each year. If my thinking is correct, I'll be able to convert my traditional IRA to a Roth IRA tax free.

If you choose option #1, you my get hit with higher taxes since you have income from your job. Also, make sure you're not paying any early withdrawal fees.

I hope this helps.

 

[wipedown]

Very nice strategy.

Is there a limit to the amount one can roll over from a Traditional IRA to a Roth IRA? (you mentioned $6000...)

Reason I ask is, Roth IRA contributions are limited to $4000/year ($5000 next year) while my company 401k (which will be rolled into a Traditional IRA) is limited to $15,000+/year.

It would be nice (and a major loophole?) to max out the 401k, then roll over & convert to Roth IRA (circumventing the $4000 limitation). Is this allowed?

 

[etf]

It would be nice (and a major loophole?) to max out the 401k, then roll over & convert to Roth IRA (circumventing the $4000 limitation). Is this allowed?

absolutely. do a "trustee to trustee" transfer - basically your account is transferred in-kind from one institution to another, or within the same institution; then, when it is in a rollover ira, ask for it to be converted to a roth. you'll pay taxes now, but then you aren't taxed for future gains/distributions.

 

[wipedown]

absolutely. do a "trustee to trustee" transfer - basically your account is transferred in-kind from one institution to another, or within the same institution; then, when it is in a rollover ira, ask for it to be converted to a roth. you'll pay taxes now, but then you aren't taxed for future gains/distributions.

Are you allowed to convert the entire amount (even beyond the Roth IRA annual limit)?

If you want to contribute to a Roth IRA that year, does the converted amount count towards the limit?

 

[etf]

Are you allowed to convert the entire amount (even beyond the Roth IRA annual limit)?

If you want to contribute to a Roth IRA that year, does the converted amount count towards the limit?

1. yes
2. no

(double check with someone else though)

 

[billermo]

1. yes
2. no

(double check with someone else though)

I believe this is correct. No limitation on conversion amount. Whatever is converted is not considered in your annual contribution since this is old money vs. new money.

In order to contribute to your roth IRA, I believe you need a source of income. So once you start school full-time with no income, you can not contribute.

I am only converting about $6,000 per year so my income matches my deductions. This way I can convert my traditional IRA to a Roth IRA tax free over a period of time. At least that's my strategy.