Rollover of 401k to Roth

[Guest 401k rollover]

I will resign my fulltime employment

position this June in order to return

to school for an MBA. I have a 401k plan with my current company.

(1) Is it possible to roll my 401k

funds over into a Roth IRA?

(2) If yes, is this a good move?

(3) If yes, I am interested in invest-

ing my 401k money into a mutual

fund Roth for high return possibil-

ities over the long-term. Any rec-

ommenations on a good fund company through which to establish my new Roth IRA account?

(4) Should I set up the IRA first with

personal funds? Or should I start

with an initial infusion of funds

directly from my existent 401k?

Which is easier?

(5) Are there any tax consequences from

rolling over from a 401k to a Roth

IRA? Or is it a transparent pro-

cess with no reflection until I

withdraw from my Roth?

[Guest Steve Palmer]

1) You should roll your 401(k) into a regular IRA first, then into the Roth.

2) Is it a good move? It depends. There are multiple variables that have to be considered. There is much information out there on this topic and you will need to educate yourself. A good starting place if the Roth IRA website at www.rothira.com

3) I don't know if we can name companies on this site. I have always been partial to no-loads.

4) You do not need to set up IRA account with personal funds. Generally you establish the recipient account and either instruct them to go get the funds or instruct the current holder to send them to the new account.

5) Yes, there are tax consequences. The conversion of your 401(k) to the Roth, via a regular IRA, will cause current ordinary income tax on the amount converted. If you have after tax, or non-deductible contributions, in your IRA these may be considered basis and would not be taxed. Check with your 401(k) plan administrator about any after tax contributions in your 401(k), I don't think these funds can be rolled into an IRA, so they may not be available to roll into the Roth.

If your resignation will cause a substantial drop in income, conversion to the Roth may be relatively painless. It looks like you will have 1/2 year income in 1999. You may want to consider only converting a fraction, if any, of your IRA to Roth in 1999 to avoid pushing yourself into a higher tax bracket. If you will be a starving student for all of 2000, you could wait until then and convert just enough to keep yourself in the 15% tax bracket.

You have some homework to do. If the amounts are material, you should contact a local financial planner or CPA who can gather all the facts about you.

Good luck with school!

[Guest 401k rollover]

Steve Palmer:

I assume that when you say that I

"should" roll my 401(k) into a

traditional IRA -- and then from

there into a Roth IRA -- you're

implying that it is not legally

possible to roll directly over

into a Roth IRA from a 401(k)

plan. Is that correct?

From your statements (which I greatly

appreciate, by the way), you appear

to be recommending that I refrain

from an immediate conversion of

traditional IRA funds into a Roth

account for the sake of preserving

a lower tax bracket. Is it safe

to say that I should -- at the very

latest -- make the conversion before

I accept a $75K/year position with a

consulting firm upon graduation with

a Stanford MBA?

[Guest Steve Palmer]

That is correct. You cannot go directly from 401(k) to Roth. (But you never know what the tax law changes may bring)

I can't recommend anything through this media. I don't know enough about you and your situation. Age, earnings, other income, beneficiaries, spouse, health, risk tolerance, income needs, time horizons, etc.

In the world of Roth conversions, it would generally be better to convert and pay tax in the 15% tax bracket, rather than in a higher bracket. One of the key variables in the analysis is the comparison of the tax bracket on conversion vs. the tax bracket upon retirment. The lower on conversion and higher on retirement may result in a favorable analysis of the Roth conversion. You need to make the call when you have more information about your annual tax picture...at the end of the year.

It sounds like you will earn and save a lot of money during your career as a Stanford MBA (only $75K to start?), so you will likely be in a high tax bracket when you retire. One more piece of advice...don't let the tax-tail wag the dog.

I lied, one more. You may want to consider establishing your 401(k) rollover into the regular IRA as a "conduit IRA". This means you can roll these specific (the account can't receive any other funds) IRA assets back into a qualified plan of subsequent employer, if they will allow it. I am not sure what effect a partial conversion of a conduit IRA to a Roth IRA would have on the ability to roll the remaining balance back in to the plan of a subsequent employer. If anybody out there has read this far, and is still awake, and knows the answer, let us know.

Thank you.