LAID OFF--need 401K to IRA advice!!

[Guest cviars]

I just found out that I will be laid off in August (After I train my replacement) due to a recent acquisition of another firm. Although my vested balance is not a lot, less than 5K, I dread the thought of paying taxes if I opted for a full disbursement. I am a full time student as well and I think I will be taking the next few months off of work so I will not be able to rollover to a new plan. I was considering rolling it over to a Roth IRA and hoped that someone could give me some suggestions for doing so. I really don't know a lot about the procedures and didn't want to sound like an idiot in my appointment with a financial advisor. Any Feedback is appreciated!!

[Michael Devault]

You basically have two options. The first is to take the distribution in cash. You will receive 80% of your account balance, because 20% will be withheld for federal income taxes. In addition to paying taxes, you may be subject to a 10% premature distribution penalty. So, for example, if your account is $1,000, you will receive $800. The remaining $200 will withheld for FIT. Next April 15, you'll have to pay taxes on the $1,000, plus a penalty of $100. So, if you're in a 15% tax bracket, your taxes due to the distribution would be $250. Since $200 has been withheld, you would owe an additiona $50.

The second option is to roll it to a traditional IRA. In that event, the money is rolled directly into the IRA and it doesn't create a taxable event. You'll owe taxes when the money is ultimately withdrawn from the IRA, presumably at age 65.

Once in the IRA, you may be able to convert it to a Roth IRA. If you meet the eligibility rules for the conversion, you'll pay tax on the amount converted from the IRA to the Roth. But, there will be no 10% penalty. Once in the Roth IRA, future growth will be income tax free.

Keep in mind that you can't take the distribution from your 401(k) plan and roll it directly into a Roth IRA; it has to be rolled to a traditional IRA first, then converted to a Roth.

Hope this is of some benefit to you. Best wishes.

[Guest cviars]

Thanks for the basic info. This is a great site and you all make it really informative! Now, I know where to begin!