401k rollover/transfer to Trad IRA or Roth
I’m getting ready to rollover my 401k into a self-directed IRA and want to know if it can go directly to a Roth (already existing) or do I have to roll to a Trad. IRA and then to the Roth. What are the tax implications of rolling into a Roth. Taxes are filed jointly; AGI = 47,500.00. Approximate value of 401k is 120,000. I maxed out my Roth for 2008 ($6000 because over 50). Any input on the above is greatly appreciated.
Thanks in advance.
Permalink Submitted by Alan Spross on Sat, 2008-03-08 01:47
You may be referring to the newly available direct Roth conversion, and/or the more traditional transfer of the 401k first to a TIRA and then have the TIRA partially or totally converted. Unless you have a much higher % of after tax contributions in the $120,000 401k, you might as well do the conversion the usual way. The assets do not have to sit in the TIRA for any length of time and can be set up for immediate Roth conversion. THis is the procedure the IRA custodians and employer plans are used to.
I suggest that the Roth conversion be made to a new Roth account instead of into the current Roth containing regular Roth contributions. This is easier in case you decide to recharacterize for any reason. If there are no after tax amount involved, converting the entire amount in a single year will inflate your marginal tax rate. You will probably be better off to convert over a 3 or 4 year period than all in the same year.
Permalink Submitted by rick karr on Sat, 2008-03-08 02:11
Hi and thanks for your reply. It all makes sense except for the comment about putting the TIRA money into a new Roth account. Can you have more than one Roth in the same person’s name.
Thanks
Permalink Submitted by Alan Spross on Sat, 2008-03-08 02:26
Yes, there is no limit to the number of Roth accounts a person may have. However, contribution rules and tax rules on distributions considers all of them as if they were one combined account.
Having separate accounts therefore does not change the tax rules, it just makes accounting for certain transactions somewhat simpler. If your IRA custodian charges you separate fees for each account, then it becomes a matter of the fees vrs. the accounting benefits, some of which you may not even need if you don’t recharacterize any part of the conversion.
For example, many people do conversions and change their minds when the tax bill comes in, don’t want to pay that much and recharacterize to erase the extra taxes. Or their income come in to high to qualify for the conversion and they MUST recharacterize. Another situation is that their investment drops so much in the Roth, that they do not want to be taxed on values that no longer exist.