converting 401k to Roth IRA?
If someone has just quit a job and is in a low tax bracket this year, can they convert the 401k from that job directly to a personal Roth IRA or must it be an IRA and then a Roth IRA? The 401 k was mostly in a money market, so it never earned much, but there is no loss this year either. The person is afraid the new administration will raise taxes significantly and wants to convert to a Roth and pay all the tax on the 401k this year (from outside savings, not touching the 401k). Changes must be made by 12/31/2008. If the brokerage receiving the funds allows a Roth IRA from a 401 k, are there any other hold-ups? Thanks. kay
Permalink Submitted by Alan Spross on Thu, 2008-12-04 20:34
The taxpayer has a 100,000 modified AGI limit for 2008 in order to do this Roth conversion. If eligible, he needs to choose an IRA custodian that understands that a Roth IRA can be opened to receive the direct transfer from the employer plan.
The taxpayer needs to understand that converting the entire plan could inflate his tax bracket for 2008 by adding the balance of the plan to his existing taxable income. Income tax rates are unlikely to rise for a couple years due to the recession, so the marginal tax rate should be largely determined by his current taxable income vrs that of next year or later years.
If his income is too high to qualify, the 100,000 limit disappears entirely after 2009, so he could wait another 13 months to do the transfer. Also, this is not an all or nothing choice. He should be able to transfer part of the balance to a TIRA first and then the remainder to a Roth IRA. The main factor here is just how much is in this plan.
If conditions are such that this is a go, time is getting short to get all the papers signed, Roth open and the transfer done prior to year end.
Permalink Submitted by [email protected] on Thu, 2008-12-04 21:54
Salary/earnings this year in 2008 are quite low so no problem with the $100,000 AGI limit. Adding a medium-sized 401-k to 2008 income makes for a moderate income and moderate taxes. You are correct that can leave a portion as a traditional IRA, to convert in drib and drabs over future years. But might be worth it to convert it all and get it over with, as this year have the extra funds in savings to pay the taxes. The brokerage house receiving the 401-k says they can open it as a new Roth IRA. ALso, it is unclear that the new adminitration and Congress won’t immediately raise taxes, as they want to wait till 2010 but, in one recent report I heard, said they might proceed in 2009, as they will need the money. Because the group managing the 401-k and the brokerage all need time to act, it is important to act quickly before 12/31/2008. kay