Can You Rollover Your 401k to a Roth IRA?

Typically, most people will initiate a 401k rollover to a traditional IRA.

A common question that I’ve been getting lately is,

“If you can roll over your 401k into a Roth IRA then how you do it?”

401k rollover into Roth IRA

Whenever you leave your job, you have a decision to make with your 401k plan.

A variation to that is if you have been contributing to a Roth 401k…..then what are your choices?

Let’s see if I can help you make “cents” of the situation. Here’s how you roll over 401k into a Roth IRA.

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Does a Roth IRA Conversion Affect Financial Aid?

If you’ve been around the blog, I’m sure you’ve noticed that I’ve written much on the Roth IRA 2010 conversion event.  It’s been getting a ton of buzz as many are eager to enjoy the tax free benefits of the Roth IRA.  As with anything, just because your neighbor is doing it, doesn’t mean you should.   We took a closer look of the some of the unforeseeable consequences of the Roth conversion and uncovered some potential pitfalls that you may have if you convert without knowing all the facts.  Another important issue for parents who have children going to college soon is the impact that a Roth conversion can have your kid qualifying for financial aid.  Tax free is nice for down the road, but converting too much could leave you with a hefty tuition bill.

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Unforeseen Consequences of the Roth IRA Conversion

This is another guest post from JoeTaxpayer.  On my blog, I’ve shared several articles that discussed the Roth IRA conversion event of 2010 in great length and detail.  While this is can be a great opportunity for many, there are several instances that a conversion does not.  I looked to JoeTaxpayer to share some pros and cons of the Roth IRA conversion and for unforeseen consequences that could result.

Unforeseen Consequences of the Roth IRA Conversion
Creative Commons License photo credit: KayVee.INC

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Gone Daddy Gone – AGI Restriction For Roth IRA Conversion

In 1982 the Violent Femmes released the title track to their debut album “Gone Daddy Gone” that went on to be an epic album.   Almost just an epic event is the lifting of the $100,000 AGI (Adjusted Gross Income) restriction for individual or couples that are looking to do a Roth IRA Conversion.   As it stands right now, for any tax payer no matter your filing status, you are unable to do a conversion if you exceed this limit.  Most everybody knows (if not, then you know now) that in 2010 these restrictions are lifted and anyone and their brother will be able to do the Roth Conversion.  If this applies to you, here are some tips to get you prepared for the Roth IRA Conversion event when the restrictions are officially “gone daddy gone”.

2010 the AGI Limits for Roth IRA Conversion are "Gone Daddy Gone"

2010 the AGI Limits are "Gone Daddy Gone"

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Four things that are making you poor


4 Things Making You Poor

Do you always feel that that you can never catch up financially?  For many, the rate race seems like a never ending cycle.  You got to work, clock in, get your paycheck and your left scratching your head what you can do to get yourself on financial track.   If you feel alone, don’t. There are many things you can do to get your investment situation on track, but for the mean time, here’s four things that are making you poor that you can change today.

1.  Throwing extra cash in your checking account.

It’s definitely very wise to save and have a good chunk in savings.   You should keep at least 8 months worth of emergency funds (12 months if your income is unpredictable) in a high-yield savings account.   But over and above that, your missing out on the potential to earn more.  Consider doing a CD Ladder.   Just stop losing money by not taken advantage of the opportunity to potentially earn more. [Read more…]

7 Things You Need to Know About the Roth IRA Rules for 2009


Roth IRA Rules for 2009

Iknow, I know.  Another post on the Roth IRA?  I wouldn’t write about it again, if I didn’t feel it wasn’t important to write about.  If you haven’t realized this, the Roth IRA and Roth 401k will have a huge impact on retirement planning over the course of the next several decades and it’s important to understand how the rules work.

For the Gen X and Gen Y crew, the Roth IRA will be an important piece of their investment arsenal.  Actually, for anybody under the age of 50 the Roth IRA rules as the best retirement plan option in this writers humble opinion.  I don’t want to isolate all my baby boomers out there.  Depending on your planning needs, the Roth IRA could make sense for you as well.  For 2009, there have been some significant changes in the Roth IRA rules and phaseout limits.  Here’s what you need to know on the Roth IRA rules for 2009.

Update: Check out 7 Things to Know About Roth IRA for 2010.

If this article was helpful, you may also want to check out these posts as well: 7 Things To Know About The 2010 Roth IRA Conversion, 2009 401k Contribution Limits Have Increased, 2010 Traditional IRA to Roth IRA Conversion Tax Rules

1.The annual contribution limit for 2009 has stayed at $5,ooo.

If you are over the age of 50, the “catch up” contribution has stayed at $1,000.  That’s a a total of $6,000 for the baby boomer looking to maximize their retirement savings.

2.Roth IRA Conversion Rules.

As I stated previously, if your income limits allow, you may want to convert to a Roth IRA with the market being down as much as it is.  The only downside is that you have to fit the tax bill all this year (not actually due until April 15th, 2010).  If you wait until the 2010 Roth IRA Conversion Event you have two things to consider:

  • The IRS is allowing you to spread that tax bill over two years and the taxes are not completely due until 2012.
  • If the market does recover in 2009 (fingers crossed, knock on wood, click my heels three times…) and your investments appreciate, you’ll be fitted with a larger tax bill.  Decisions, decisions.

3. The Roth IRA Savings Account

One of the coolest things about the Roth IRA is that you can pull out your contributions at any time, which is a huge difference that it’s Traditional IRA and 401k counterparts.  Basically, it allows to treat your Roth IRA like a savings account having access to your money whenever you need it.  Is it really that simple?  Kind of.  Here’s a few things to keep in mind.

  • It just applies to your contributions (money you put in), not the earnings or interest you make off those contributions.  The earnings are subject to the IRS Qualified Distribution Rule. Here’s more info on the Roth IRA distribution rules.
  • If you put $5,000 in your Roth IRA and buy one stock (or any other investment for that matter) and it loses value, you can’t withdraw the $5,000.  It’s based on the actual investment value.

4. Free Money, Then Tax Free Money

roth-ira-rules-contribution-limitsAs much as I love the Roth IRA, it doesn’t mean it’s the first place you need to stick your retirement savings.  If your employer’s 401k offers a match, take the free money.  After the 401k match, then it’s time to get the tax free money of the Roth IRA.

In case you missed that…..Roth IRA = Tax Free Money.

5. Roth IRA Phaseout Limits Have Increased

For those that may have missed the “tax free” boat last year, the good news is that the IRS has increased how much you can earn in 2009 and still be able to contribute.  For a single filer, the phaseout range begins at $105,000 AGI and is completely phased out at $120,000.  For a joint filers (this is good news for me), the phaseout range starts at $166,000 and phases out at $176,000 AGI. You must stay in the phaseout ranges to qualify for a Roth IRA.

6. Change Your Mind on Converting? Just Recharacterize

Without getting too detailed (you can read more in another post), if you do convert and decide you want to go back to the Traditional IRA rules, you can do what’s called an IRA recharacterization.

7. Don’t Get Confused About 2010

rules-for-roth-ira-limitsThe 2010 conversion event allows you to convert your traditional IRA’s or old 401k’s into Roth IRA’s no matter your income limit or AGI.  That doesn’t mean that anybody can make a “new” contribution for 2010.  For example, let’s look at a joint filer that makes $225,000 AGI.  They would be allowed to convert to a Roth IRA, but not be allowed to put in any new money.  Probably won’t make a difference when you consider let’s say converting $70,000 to a Roth IRA vs. adding a new contribution of $5,000.   Time value of money will make the $70,000 conversion a nice little tax free nest egg waiting for you at retirement.

*Restrictions, penalties and taxes may apply.  Unless certain criteria are met, Roth IRA owners must be 59 1/2 or older and have held the IRA for 5 years before tax-free withdrawals are permitted.

Securities offered through LPL Financial member FINRA / SIPC.

Roth IRA- Time To Convert Your Traditional IRA’s and 401k’s?

The 2010 Roth IRA Conversion event can’t get here soon enough.  As you may know, this is the time that anybody will be able to convert their traditional IRA’s to Roth IRA’s no matter your income level.  But currently as it stands now, if you make over $100,000 AGI Married Filing Jointly, your left counting the days until you are allowed to do so.

Common Misconception on Converting

A few people I’ve talked with thought that everybody had to wait to convert until 2010.  This is not the case. In fact, for many of you that have been contemplating whether to convert your former traditional IRA to a Roth IRA, now might be the year to do it.  With the recent decline in the market for 2008, chances are you’ve seen your investment accounts drop in significant value.  If you have a traditional IRA or a 401(k) at a previous employer, this might be the opportunity to convert that into a Roth IRA.

Why Is This A Good Time To Convert to a Roth IRA?

Reason being, when you convert to a Roth IRA, you have to pay the ordinary income tax on the converted amount.   By converting this year, your IRA’s have most likely dropped significantly and you will then have less to pay ordinary income tax with.  Sure it’s not exciting to see your account drop 30-40%, but if you could sock that away in a Roth IRA, think of all the tax free money down the road……woo-hoo! [Read more…]

IRA Recharacterization

IRA Recharacterization Rules

IRA Recharacterization Rules

As the stock market continues its roller coaster of 2009, many are seeking for positive news.  While I’m sure that there are many good buys out there, one thing that is certain are that we can look to benefit from tax savings.  How, you ask? Well, in down times, one thing that investors can look forward to is to take advantage of things such as tax loss harvesting in taxable investment accounts, which involves selling depreciated holdings to take advantage of losses that can offset other income.  Not only in taxable accounts, but we may also be able to take advantage of retirement accounts as well. This is what’s called IRA Recharacterization.  Some of the issues can be complex; but with a little bit of information, we can try to make sense and explain the rules.

The Roth IRA Conversion

As you may or may not know, Roth and traditional IRAs are retirement vehicles that allow you to shelter income from taxes.  In a Roth IRA, withdrawals can be tax-free and as an investor, you are not required to take distributions at the age of 70 ½ as you would with a traditional IRA.  The trade-off, of course, is that with the Roth IRA there is no tax deduction like you would get with a traditional IRA or a 401(k).

In a market as such, some investors may have done what’s called a conversion where they have converted their traditional IRA to a Roth IRA.  This could be advantageous for some that are looking to take advantage of the tax-free withdrawals in the Roth IRA.  The one drawback by converting is that when you do convert from a Roth IRA to a traditional IRA, the entire amount is treated as ordinary income, which means we will have to claim that amount on your income taxes for the year and pay the appropriate income tax.  For those that had converted for 2007, the value that was converted then, if invested in the stock market, most likely is worth less now.  As an example, if you had $20,000 in your traditional IRA that you converted last year that value may be worth only $15,000 today. [Read more…]

2010 Roth IRA Conversion


Are you ready for the Roth IRA conversion?

A very exciting thing is getting ready to occur! Are you ready? You know how excited I am about the Roth IRA.  Well, something exciting is getting ready to occur within the Roth IRA realm that many do not know about. What is it?  It’s the 2010 Roth IRA conversion event.

If this article was helpful, you may also want to check out these posts as well: Roth IRA- Time To Convert ,7 Things You Need to Know About the Roth IRA Conversion for 2010, Roth IRA Conversion Tax Rules.

The 2010 Roth IRA Conversion Is Coming

Currently, if you have money in a traditional IRA and you want to convert it to a Roth IRA, you are unable to do so if your Adjusted Gross Income is greater than $100,000 a year. This is especially frustrating if your income is greater than the Roth IRA Phaseout Limits that leaves you without being able to take advantage of one of the greatest retirement planning tools. Don’t be depressed yet. There is still hope. Drum roll please……Introducing the 2010 Roth IRA Conversion Event. What happens in 2010 is that these income limits will become extinct, so that anyone, no matter your income limit, can convert from traditional IRAs to Roth IRAs.

Tax Ramifications

The one thing to be knowledgeable about is that we will have an income tax consequence due to this action, but the IRS has implemented a favorable tax treatment upon doing this. The favorable tax treatment works like this:

  • Usually if you convert from a traditional to a Roth, you are then burdened with the tax owed that current year, based off your ordinary income tax rate.
  • But the IRS has graciously allowed you to defer your tax owed in 2010, to where you only have to pay half of the tax burden on your 2011 return, and the remaining half on your 2012 tax return.
  • It’s a  nice little incentive if you are considering converting your traditional IRA  or old 401k’s to a Roth IRA because of this favorable tax treatment.

This strategy is not right for everyone. As usual, you want to talk to your tax professional or financial planner before implementing this strategy.