AFTER LOSING JOB, HOW DO I CONVERT MY DEF. BEN. PLAN TO ROTH?

[Guest DALED]

I AM LOSING MY JOB THROUGH CUTS. I HAVE COMPANY STOCK AND MUTUAL FUNDS TOTALING OVER 50K. I AM 30 YEARS OLD AND WOULD LIKE TO ROLL OVER TO A ROTH. CAN I PAY THE TAX, THEN PUT THE DIFFERENCE IN THE ROTH OR HAVE TO PUT 50K IN ROTH AND PAY TAX OUT OF POCKET. DOES THE 2K LIMIT PER YEAR APPLY? IS ROTH THE WAY TO GO. THANX DD

[Kathy]

First you must check with your plan administrator and read your Summary Plan Description to see what you are entitled to and when you are entitled to it.

Then, if you are entitled to a distribution, you should establish a traditional IRA to receive the direct rollover from the plan.

Once you have the traditional IRA established to receive the distribution, you'll have to fill out all sorts of paperwork from the plan administrator - indicating you have received and read information regarding the taxability of any distributions from the plan. Your best bet is to work closely with the plan administrator to make sure you complete the paperwork correctly to receive a direct rollover into your IRA.

Once the money has been rolled into the traditional IRA (this process can take a while depending upon when you're entitled to a distribution (after a break-in-service or after the end of the year of termination, etc...) and when the plan distributes (only after a valuation date?) you can then convert the traditional IRA to a Roth.

You may convert as little or as much of your traditional IRA to a Roth as you like, as long as your MAGI is under $100,000 for the year. If you are married you must also file a joint return for the year of conversion.

Roth IRAs are great, especially for young people who have years and years for it to accumulate tax-free earnings. However, they are a bigger benefit if you can pay the taxes on the converted amounts from a source outside of your IRA. To this end, you might want to consider how much you can afford to pay in taxes and work backwards from there determining how much you can convert without having to pay taxes from the IRA money.

[John G]

Daled, I am assuming that you are talking about stock and mutual funds that are part of a retirement plan. If that is correct then..... You might want to think carefully about how you tax rates may be jumping around. For example, if you plan to go to grad school, you might want to wait until next year to convert. Another issue would be if you meet the income qualifications in 1999, but might not next year.

There are also some issues involving company stock. Under some circumstances you can sell the stock as a long term gain with a lower tax rate. This is only an issue if (1) you are eligible, and (2) you want the trade off of long term capital gains over ordinary income.

Keeping the 50k sheltered for the long haul is wise. Paying the tax out of pocket maximizes the size of the tax shelter. You may want to use some of the internet based calulators to run some scenarios. There are complicated circumstances where you might be best off not converting.

The 2K limit applies to both Roth and regular IRA contributions. That you stuck this in your paragraph makes me wonder if the other funds were tax shelter.

I would recommend that you buy a hour of CPA time after tax season blows over and discuss your options.... in addition to talking with your plan administrator. Good luck.