IRA Rollover

Archive for March, 2008

Question: Rollover to Roth IRA?

Hi everyone. Currently I have a Roth IRA, Traditional IRA, and 401k. I’m only contributing to the Traditional right now because my current employer does not offer a retirement plan (they will soon). My wife has the same set of accounts but is contributing to her Traditional and company’s 401k.

I’m considering:
- rolling over my 401k into my Roth IRA
- get rid of my wife’s IRAs and rollover that money into my Roth IRA just to consolidate our accounts.

In order to rollover my 401k I think I may have to first roll it into a traditional IRA and then in 2010 rollover my Traditional IRA into a Roth IRA. Is my understanding correct?

It’s also my understanding that I’ll have to pay taxes on the rolled over 401k money since it is pre-tax money but I can do that over 2 year (2011 and 2012) I think. Is that correct as well?

And I guess my more general question would be: is this a wise retirement move for my wife and I?

Thank you!

Answer: Yes, do roll over your 401(k) into a Roth IRA. There are 17 different types of fees that your plan administrator can charge to your 401(k) account without disclosing these to you. They are taken net of earnings, and over a 20-year time period could easily reduce your accumulated value by 50% or more.

You cannot consolidate your wife’s IRAs with yours. They must be kept as individual retirement accounts. There is no such thing as a joint individual retirement account.

If your household income is greater than $100,000, then you are correct about having to convert to the traditional IRA first. The income limits for conversion to Roth IRA are considerably lower than the income limits for contributing to a Roth IRA. In 2010, there is an exception, and you will be able to convert your traditional IRA to a Roth IRA regardless of your income.

Yes, you will have to pay regular income tax on the conversion. If the market is still down six months from now, and there is a better-than-even chance that it will be, you’ll have picked a great time, taxwise, to convert. And, because of the special conversion rule in 2010, you don’t have to report conversion income in 2010. You can report it in equal amounts in tax years 2011 and 2012.

The Roth IRA is almost always a better choice than the traditional IRA if you qualify for a Roth IRA. Taxes are likely to be higher in the future, so it’s to your advantage to contribute with post-tax dollars now and avoid the higher taxes in future years. And, if you’re young, most of the accumulated value in your Roth IRA will be from earnings, and those are never taxed (assuming you follow all the rules). Also, you are not required to take distributions from your Roth IRA at any age – another big tax benefit for you and your heirs.

By the way, the IRS Publication is 590, not 940.

How to Convert to a Roth IRA- 2010 Strategies from PENSCO Trust