IRA Rollover

Archive for August, 2006

Question: 401k Rollover to either Roth IRA or Traditional IRA?

Can someone explain these lines for me? I took them off from the small prints where my 401K’s at.

“Federal income tax will not be withheld from a direct rollover to a Roth IRA . You are responsible for making sure that your estimated tax withholding is correct if you make a rollover from the Plan to a Roth IRA”
“If you receive the DISTRIBUTION yourself and make a rollover to a Roth IRA, the amount of your distribution is subject to 20% mandatory income tax withholding on the taxable portion. The additional 10% penalty tax for certain distributions that are paid to you prior to age 59.5 does not apply to your distribution if you roll it over to a Roth IRA
When they said that “your distribution is subject to 20% mandatory income tax withholding…” What do they mean distribution? Is it the distribution of money to you from the 401K, and then you do a contribute them in a Roth IRA?

Answer: the amount of tax WITHHELD doesn’t necessarily cover ALL The tax you will owe and you WILL OWE tax and penalty if you roll over to a Roth IRA – you could be throwing away 35% or more of your money by doing that between tax and penalty

distribution is when you withdraw from an IRA or 401k and the money comes directly to you – DON’T DO IT THAT WAY if you are transferring the money to an IRA! – if you plan on transferring the money to an IRA – do a DIRECT ROLLOVER and let the IRA administrator handle the transfer for you, then you won’t incur any taxes or penalty or withholding (so long as you roll it to a REGULAR IRA-not a Roth)

if you withdraw the money and then put it in an IRA yourself, taxes WILL be withheld and you will have to replace that money or it will become a taxable withdrawal and you’ll have to pay the 10% penalty