401K -> IRA -> Roth IRA question (cross posted from 401k board)

[Guest sudhirao]

hello all!

i am 33 and its about a year since i left my previous employer. i still have a 401K account with them and am wondering if it'd be a good idea to rollover the money in it into a regular IRA and then to a Roth IRA.

can somebody give me pointers on all the factors i should consider while doing so?

at what rate will i have to pay taxes when i do the conversion (IRA -> Roth IRA)?

also, i do have a new 401K plan with my current employer as well.

thanks,

sudhir

[ElGuapo]

Generally speaking, I like the idea of rolling over to IRA and then converting to Roth for someone your age. You'd do the rollover to traditional IRA first with the custodian of your choice (not a taxable event), then you'd have the new custodian convert it to Roth. The fair market value of the conversion gets treated as taxable income for the year in which it was converted, so your marginal tax rate would apply.

Things I'd be considering:

*tax bracket What stage are you at in your career? If your marginal tax bracket is still 15%, it's a no brainer (IMHO) to convert at least enough to bring your AGI up to the limit of that tax bracket. I don't know what the number is off the top of my head, but someone here will know.

*cost Are you getting a good deal with the current 401(k) or could you do better at a large no-load mutual fund company? This may require a little digging to find out how expensive the investment choices are with your old 401(k). Was it a large corporation or small? What kind of balance is left there?

*investment knowledge Are you comfortable going it alone with a fund company? Most 401(k)s have limited choices, but that also means damage control. My guess is if you were smart enough to come to this site and ask you could work with a fund company to get some appropriate funds in place.

*maximizing contributions Are you also fully funding a Roth IRA annually? If you are (a) contributing enough to your current 401(k) to get the full employer match and (b) also putting the max annual contribution into a Roth, then you could look at converting as a way to get even more money put away for retirement. In other words, think of the taxes you pay on conversion as a contribution toward your retirement fund that you wouldn't have been allowed to make otherwise.

*access to funds Once your converted assets have been in the Roth 5 years you'll be allowed to withdraw that amount tax and penalty free--not that you'd want to, but it's nice to know you can.

There are probably more considerations, but I have to get back to the Shaq-Kobe showdown.

[John G]

The rollover and conversion may be a good idea... you did not provide enough info to give you good advice.

Info needed on:

1. Current approximate income.

2. 1040 filing status, married, single?

3. Can you pay the taxes for the conversion with non-IRA or non-401k money?

4. What 401K options due you have with the new employer (an alternative would be to see if you can move 401a into 401b.

5. Investing knowledge? How do you plan to invest the Roth?

6. Income tax rate (if any) for your state?

It is a holiday weekend, I hope I got the key data right. You normally do not want to even thing about conversions if you must use the IRA or 401k funds to pay the taxes that would be due.

Rollover and conversion might make sense if your income was lower this year because of a gap between the two jobs.

[GBurns]

I suggest that you search this Board for related threads such as this one:

http://benefitslink.com/boards/index.php?showtopic=27215