401k Rollover to Roth IRA
Hello, I am a full time college student and I also work part time. I have been working at the same employer for about a year now, and while working, I have opened a 401k with my employer and also a Roth IRA through my broker (Schwab). In the fall I plan to go back to school full time and take a leave of absence until the beginning of the holiday break. Since I am doing this I wanted to go ahead and rollover my 401k into my existing Roth IRA were I can control it myself (quite well I might add), and where it is not charged a management fee in some bogus funds. I understand however that this carries tax implications since the money in my 401k is pre tax. The current total value of my 401k account is about 1,250.00 USD. I would like to know if it is advisable to rollover my 401k to my Roth, and if so, I would like to know the size of the tax liability I would create for myself. Also, how would I declare this on my 2009 return? I have read in articles that I could spread out the tax liability from the rollover over a few years. Thanks for the help.
-Ricardo
Permalink Submitted by Alan Spross on Tue, 2009-06-23 20:33
Your tax bill for the conversion is determined by your tax bracket. Adding additional income of 1,250 is probably less than what you would have made during the leave of absence, but under a LOA you might still be considered an active employee and may not be able to rollover the funds. Generally, you would have to be considered a former employee, ie separated from service in order to get distribution of your funds. I would check into that first. If the rollover can be done, figure an estimate of the tax using your 2008 return, but adjusting your income for 2009 and adding in the 1,250.
IF you are considered separated, you will probably have to roll your account over because it is less than 5,000. If that is the case, best to do it at your convenience and not wait to get a letter from the plan and a deadline. Another thing to consider is waiting to 2010 if your income will be less in 2010 than 2009. If you happen to be in a higher bracket than 15%, it might be best to roll the funds to a TIRA rather than a Roth.
Spreading the tax bill over two years is only available on conversions done in 2010, not 2009. If you can, best to do the conversion in your lowest income year if you will be in a lower bracket for that year. Whatever you decide, do it by direct rollover to avoid mandatory 20% withholding on the distribution.
Permalink Submitted by Ricardo Camacho on Wed, 2009-06-24 14:04
Thank you very much. If it helps I am a dependent and my agi was around 13,000 last year. I will probably wait until Jan. 2 2010 and then do the rollover.