Convert from 401k then contribute, or vice versa, or does it matter?

[Guest cemile]

First, let me say that this site and the opinions from contributors is absolutely great. I've learned so much here, but after reading back 10 pages of questions, I still want to be 100% sure on my planned course of action. Any advice is greatly appreciated:

My husband and I want to establish new Roths before the 4/17/00 deadline. (We've already filed our 99 return, but I don't think this matters, does it?) I also have $90K in a 401k plan from my previous employer (I'm now unemployed) that I was thinking about converting to an IRA, then right into a Roth.

My first question: does it make more sense to first establish the new Roths, then add conversion money into mine (and then an additional $2K for the year 2000 max contribution)? From researching on this site I think I CAN do all this - convert and contribute into the same Roth - am I right? Or, should I convert my 401k first, then contribute $2K (probably only have time for the year 2000 contribution then though). Or does it not make a difference at all?

Second question: is there a good tax calculator that would show me exactly what I'd owe in taxes after rolling 401k over to IRA, then converting to Roth? Are these taxes payable upfront when converting, or April 15, 2001 on my tax return?

Third question: if all money in a Roth and especially earnings on investments, are always tax free, why would anyone keep large sums of money in a 401k?

Thanks in advance for your help. I'm determined to take more control of my money in 2000 and this site has helped tremendously.

Claudia

[John G]

Hey, you exceed the limit on questions !

I will only attempt to answer a few. First, if you want to open a Roth for 1999 you better get cracking. You have two weeks to get it done and this is the busy season. Any rollover and conversion could easily get messed up in this peak period and not get done by April 17. Therefore start with the contributory part, and that can include both 1999 and 2000 at the same time (just use two checks and mark the contributory years clearly, then check statements for correct designation). Give those custodians a break and wait until after April 17 to handle the conversion, unless......

One caveat, if your 401 is in some tech stocks, then you might want to get the rollover/conversion started now to take advantage of a depressed stock price, and therefore lower taxes. But don't think that you set the timing... the custodian might just sit on that request for a couple of weeks, so unless you have some pull with your custodian, the admin timing will be set by them and therefore the stock prices are beyond your control.

You don't need a special tax calculator. What ever you convert will be added to your total taxable income, just like a bonus. So you can use basic the IRS tax tables. You do not have the 4 year average option, that was a 1998 feature only. Conversion during a year of depressed income (such as when you end employment) can be advantageous. But remember you still must meet the income qualifications. Since your income is likely lower, you are mostly likely going to pay estimated taxes. Get can ask your tax preparer to run out a sample 2000 tax return to give you a guide for a schedule tax liability.

There are other issues you raised which I can not address, wait for additional comments.

[This message has been edited by John G (edited 04-04-2000).]