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Tax Accountants and folks in the know: Pre-Tax 401k to a RothIRA

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Tax Accountants and folks in the know: Pre-Tax 401k to a RothIRA

Old 07-10-2015, 10:35 AM
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Default Tax Accountants and folks in the know: Pre-Tax 401k to a RothIRA

I've read and read and read... and I *think* I have it right... but thought I'd put it up here.

If you have a Pre-Tax 401k (meaning the funds that went into said 401k were never taxed) -- and you want to put them into a Roth IRA. (no portion of the 401k is post-tax). These are what I believe to be the salient point of the transfer... but if I've missed any big ones or have a "no-no" in there... hit me with it!!

1) You are free to put the entire value of the 401k into said Roth.
2) You will need to pay your current tax rate/bracket on the 401k funds (the current value of the 401k)
3) You need to do it within the number of days allowed or you get a penalty (best to let the brokerage house do this and ensure that it is 100% of the funds being transferred... *not* the deal where the origin holds 20% and cuts you a check for 80%)

Upon withdraw of funds you are *not* liable for any taxes on that money or the money said money has earned while in the Roth, regardless of your earnings or bracket at that time.

If I've got it wrong or if there is anything else you could add that I could have missed - I'd really appreciate it.

I have a meeting setup with my guy, however he's on vacation and I'd like to go in not being a total moron. :D

Thanks,
Pete
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Old 07-10-2015, 10:42 AM
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have the funds of 401k directly transferred to the financial institution...do not let your company issue YOU a check.
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Old 07-10-2015, 10:51 AM
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Originally Posted by OldPete View Post
I've read and read and read... and I *think* I have it right... but thought I'd put it up here.

If you have a Pre-Tax 401k (meaning the funds that went into said 401k were never taxed) -- and you want to put them into a Roth IRA. (no portion of the 401k is post-tax). These are what I believe to be the salient point of the transfer... but if I've missed any big ones or have a "no-no" in there... hit me with it!!

1) You are free to put the entire value of the 401k into said Roth.
2) You will need to pay your current tax rate/bracket on the 401k funds (the current value of the 401k)
3) You need to do it within the number of days allowed or you get a penalty (best to let the brokerage house do this and ensure that it is 100% of the funds being transferred... *not* the deal where the origin holds 20% and cuts you a check for 80%)

Upon withdraw of funds you are *not* liable for any taxes on that money or the money said money has earned while in the Roth, regardless of your earnings or bracket at that time.

If I've got it wrong or if there is anything else you could add that I could have missed - I'd really appreciate it.

I have a meeting setup with my guy, however he's on vacation and I'd like to go in not being a total moron. :D

Thanks,
Pete
Open the Roth first.
As SO said, don't get a check...go institution to institution (or same institution if possible). This is because if your company issues you the check, they'll withhold about 20%, but you'll be on the hook to deposit the entire amount into the Roth (including the 20% they are withholding) to avoid early withdrawal penalties.
Disbursements are only tax/penalty free post 59.5 years (with very few exceptions).
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Old 07-10-2015, 01:37 PM
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DO NOT TAKE PERSONAL POSSESSION OF FUNDS!

The entire amount rolled over will be considered 'income' for the tax year of the re-characterization. If part of the 401 has already been taxed, the taxed contributions don't get hit again. I rolled a bunch during the recession when Obama threw little people a bone and allowed the 401 to be spread over two years, now it's all in the year rolled. If one can take the tax bite, Roths are NOT considered in MRDs ...
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Old 07-10-2015, 01:38 PM
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Damn it is FRIDAY afternoon and do not want to THINK
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Old 07-10-2015, 01:42 PM
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Open a Roth and a Traditional.

Transfer the Post tax funds to the Roth and the pre tax funds to the Traditional, zero tax consequence.

If you then want to convert part or all of the traditional you can do it whenever you want.

The IRS tightened everything up on this late last year and gave the green light starting 1/1/2015 that you can do this without issue. There are quite a few articles talking about this on the net.

Of coarse consult your tax adviser and don't take tax advice from strangers on the internet
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Old 07-10-2015, 03:08 PM
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Originally Posted by schoolsout1 View Post
have the funds of 401k directly transferred to the financial institution...do not let your company issue YOU a check.
Originally Posted by Ronn Burgandy View Post
Open the Roth first.
As SO said, don't get a check...go institution to institution (or same institution if possible). This is because if your company issues you the check, they'll withhold about 20%, but you'll be on the hook to deposit the entire amount into the Roth (including the 20% they are withholding) to avoid early withdrawal penalties.
Disbursements are only tax/penalty free post 59.5 years (with very few exceptions).
Originally Posted by Curmudgeon View Post
DO NOT TAKE PERSONAL POSSESSION OF FUNDS!

The entire amount rolled over will be considered 'income' for the tax year of the re-characterization. If part of the 401 has already been taxed, the taxed contributions don't get hit again. I rolled a bunch during the recession when Obama threw little people a bone and allowed the 401 to be spread over two years, now it's all in the year rolled. If one can take the tax bite, Roths are NOT considered in MRDs ...
Thanks guys... I got that one covered in #3 in my OP.
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Old 07-10-2015, 03:09 PM
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Originally Posted by captpepin View Post
Open a Roth and a Traditional.

Transfer the Post tax funds to the Roth and the pre tax funds to the Traditional, zero tax consequence.

If you then want to convert part or all of the traditional you can do it whenever you want.

The IRS tightened everything up on this late last year and gave the green light starting 1/1/2015 that you can do this without issue. There are quite a few articles talking about this on the net.

Of coarse consult your tax adviser and don't take tax advice from strangers on the internet
This is interesting... so you're saying if I go from a Pre-Tax 401k > Traditional IRA > to a Roth and I don't have to pay taxes at any time on the Pre-Tax 401k???

I'm going to need read-up on that one.
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Old 07-10-2015, 06:43 PM
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to a Roth and I don't have to pay taxes at any time on the Pre-Tax 401k???

You don't have to pay tax on the 401 if you roll it to a traditional IRA (apples to apples), tax status is still 'deferred'. Should you then re-characterize any part of the traditional to a Roth (apples to oranges), there are tax consequences. At least I think that's where he went with it ...
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Old 07-10-2015, 07:05 PM
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Originally Posted by captpepin View Post
Open a Roth and a Traditional.

Transfer the Post tax funds to the Roth and the pre tax funds to the Traditional, zero tax consequence.

If you then want to convert part or all of the traditional you can do it whenever you want.

The IRS tightened everything up on this late last year and gave the green light starting 1/1/2015 that you can do this without issue. There are quite a few articles talking about this on the net.

Of coarse consult your tax adviser and don't take tax advice from strangers on the internet
Yep, I'm so glad the irs made up their mind about that. Don't forget about the pre 87/post 86 year rules if your account is that old.
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Old 07-11-2015, 06:31 AM
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There are very few times converting an IRA or 401k to a Roth makes financial sense - the tax rate will be very high (likely max federal 39.4% + max state), and as a result you will never get that money back.
In recent times (last 20 years), the only time it made sense was 2008/9 - when the stock market dropped 50%; if you had done it then, and paid the taxes then on your portfolio that had shrunk by 50%, and has since gone up 125%, you would be well ahead.
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Old 07-11-2015, 07:06 AM
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Originally Posted by LI32 View Post
There are very few times converting an IRA or 401k to a Roth makes financial sense - the tax rate will be very high (likely max federal 39.4% + max state), and as a result you will never get that money back.
unless, of course, you're going to live to 110.
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Old 07-11-2015, 07:38 AM
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If you you have after tax contributions in your 401k then there was new guidance issued from the IRS late last year. This would be in plans where contributions were made before the roth 401k came around.

There is a little info out there now. The custodians do not seem knowledgeable at this time.

https://www.fidelity.com/viewpoints/retirement/IRS-401k-rollover-guidance

As always consult an accountant.
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Old 07-11-2015, 07:41 AM
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Originally Posted by LI32 View Post
There are very few times converting an IRA or 401k to a Roth makes financial sense - the tax rate will be very high (likely max federal 39.4% + max state), and as a result you will never get that money back.
In recent times (last 20 years), the only time it made sense was 2008/9 - when the stock market dropped 50%; if you had done it then, and paid the taxes then on your portfolio that had shrunk by 50%, and has since gone up 125%, you would be well ahead.
Can you explain that... Why would I pay 39.4% fed. on the money from pretax 401k to Roth if I wasn't in that bracket?
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Old 07-11-2015, 07:57 AM
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Originally Posted by OldPete View Post
Can you explain that... Why would I pay 39.4% fed. on the money from pretax 401k to Roth if I wasn't in that bracket?
Tax rates and brackets are highly progressive.
Assuming you are going to convert a 401k of $200,000 or more and you make more than $100k/yr now, it will be taxed as ordinary income, and since it is only income up to about $115k that is taxed at really low rates, most all of that 401k conversion will be taxed at 39.4%, which is the rate for over $200,000 in income.
Welcome to the world of being middle class in NY.
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