Comments on: Google Asks About Roth IRAs

By: Rich

Rich — Tue, 04 Nov 2008 11:43:03 +0000

Now my 401K has decreased to 201K(lost half of the value), how much do I use to calculate my tax ?. I understand that I will have to use two steps. First convert my 401K to a rollover IRA, then convert the rollover IRA to Roth. The 401K actually lost the value to 1/2 of the basis of 401K(the amounts the employer contributed and my deferred salary amount). Originally was $25,000 but now the account is $12,500. Do I pay the tax on 25,000 or 12,500?

Thank you my name is Rich but I am not rich

By: Ray

Ray — Fri, 04 May 2007 13:39:53 +0000

Tim and tinyhands,

Thanks to both you guys. I appreciate your taking the time to clear this out for me.

By: tinyhands

tinyhands — Wed, 02 May 2007 20:53:34 +0000

Agreed, I was unclear. I was envisioning taking a distribution from the 401k without having the appropriate destination account(s) in place, then trying to deposit the funds in their entirety.

By: Tim

Tim — Wed, 02 May 2007 19:46:39 +0000

tinyhands and Ray,
tinyhands erred or was a little unclear in advice given in regards to conversion to RIRA. you are not penalized 10% nor penalized for excess contribution to RIRA if you rollover 401K to TIRA then convert from TIRA to RIRA. you will, though, have to pay taxes on the amount converted to RIRA since you have not paid taxes on them (i.e. 401K was pre-tax and TIRA is pre-tax). You must ensure you meet the max AGI limit to convert to TIRA. the rollover to TIRA and the conversion to RIRA do not count toward to $4k annual contribution limit. It is separate. so you could rollover your entire 401K to TIRA and then convert entire TIRA into RIRA and still contribute $4k to your IRA for the year. moreover, the amount you rollover or convert does not get added into your AGI in determining eligibility to convert to RIRA.

just ensure that if you do convert to RIRA to est. a decision point for recharacterization if needed–that is, one, if your AGI is higher than the limit for conversion; two, if your converted RIRA is worth less towards the end of the year versus the period you converted.

By: tinyhands

tinyhands — Wed, 02 May 2007 18:12:09 +0000

Dustin – You must remove the excess contribution and any gains attributable to it. You may recharacterize the contribution as a traditional IRA contribution (which may or may not be deductable, likely not). If you simply withdraw your contribution, you’ll pay taxes now on the gains attributable to it (which you must also withdraw). The easiest going-forward solution to this is not to contribute to your 2007 IRA(s) until 2008 when you know how much you made in 2007.

Ray – It is usually in your best interest to move the money out of the employer’s 401k so that you can invest and diversify it yourself. Exceptions are when you only have a tiny bit of money or if your former employer has an exceptional (and cheap) plan. Rollovers go into Traditional IRAs (unless your 401k is a Roth 401k, which are not common) and there are no fees or penalties. There are no direct rollovers to Roth IRAs (except as before with a Roth 401k) so you’ll be penalized 10% (assuming you’re under age 59 1/2) and pay your marginal tax rate, plus you’ll (likely) be penalized for excess contributions to the Roth. Bad idea, so you probably want to go with a rollover to a traditional IRA (aka rollover IRA).

Mike – Yes, this is both possible and easy because an IRA is an IRA no matter where the account is held. It is called a change of custodian. Your current custodian (TD) may charge you a small account transfer fee ($50), so ask yourself why you really want to do it.

By: Tim

Tim — Wed, 02 May 2007 05:38:49 +0000

last comment: if you are married, and one spouse does not have income, you can still contribute to both your and your spouses IRA, so long as you earn the minimum requirement to cover both IRA’s and again do not have AGI greater than the ceiling.

By: Tim

Tim — Wed, 02 May 2007 05:36:13 +0000

1. each person can have a combination of RIRA and TIRA up to $4k within your AGI limits.

2. converted TIRA to RIRA does not count as part of the $4k. you can convert the whole amount if you are within the income limit for the conversion.

3. the conversion amount is not added into income for the purpose of determining the income limit for conversion (that is, if you want to convert $10k and your MAGI is $85k, you are still eligible to convert from TIRA to RIRA if filing jointly because your MAGI is only $85k)

4. if you are income is close to any of the AGI limit restrictions, then you will have to recharacterize before the end of the year. first, if filing jointly and you determine that your AGI will be greater than $90k, and you converted TIRA into a RIRA in january, you will need to recharacterize back to TIRA. second, if your AGI is greater than the limits for contributing to an IRA, then you will need to withdraw your IRA contributions before the end of december. recommend making this decision around october to execute in november. if not, the processing time, could result in penalties if you do not recharacterize on time.

5. if converting for TIRA to RIRA, remember you have to pay taxes on the amount. A good idea is to have a time to determine if it is worth paying taxes on the conversion. my decision point is in october. I converted TIRA to RIRA in january. if the RIRA has not increased in value by october, i will recharacterize. why? no sense in paying taxes on what is essentially a loss–that is, if your RIRA is worth less in october than in january, you are paying taxes on a loss.

6. you do not have to convert the entire amount of TIRA into a RIRA. you can do a partial conversion.

7. as of now you cannot convert a 401K directly into a RIRA. you have to convert to a TIRA first, then convert from TIRA to RIRA. in 2010 you will be able to directly convert from 401K to RIRA.

8. Mike, yes, you can transfer your RIRA from TD Ameritrade to Vanguard RIRA. just look at Vanguard’s website or call and they wil explain. it is simple, just ensure you are aware of the fees associated with it.

9. if contributing to IRA in the jan-apr time period, remember to specifically annotate the tax year for the contribution. you will be assessed a penalty if you over contribute to an IRA.

10. it is important to know the deadlines for conversion, withdrawals, and contributions.

By: Mike D

Mike D — Wed, 02 May 2007 02:05:59 +0000

I have a Roth IRA with TD Ameritrade that was opened by my parents when I was in college. I’d now like to transfer it over to Vanguard Roth IRA. Is this possible?

By: Ray

Ray — Tue, 01 May 2007 20:54:56 +0000

I have some money in 401K through my previous employer and I am thinking of moving to my IRA account. Should I move it to IRA or Roth IRA? Also, will there be a penalty if I move it to Roth IRA?

By: Jacob

Jacob — Tue, 01 May 2007 20:29:40 +0000

Contributions to SEP IRAs don’t count against the total you can contribute to a regular or Roth IRA. From the IRS website:

Roth IRAs and traditional IRAs. If contributions are made to both Roth IRAs and traditional IRAs established for your benefit, your contribution limit for Roth IRAs generally is the same as your limit would be if contributions were made only to Roth IRAs, but then reduced by all contributions (other than employer contributions under a SEP or SIMPLE IRA plan) for the year to all IRAs other than Roth IRAs.
This means that your contribution limit is the lesser of:
$4,000 ($5,000 if you are age 50 or older) minus all contributions (other than employer contributions under a SEP or SIMPLE IRA plan) for the year to all IRAs other than Roth IRAs, or

Your taxable compensation minus all contributions (other than employer contributions under a SEP or SIMPLE IRA plan) for the year to all IRAs other than Roth IRAs.

By: Dustin

Dustin — Tue, 01 May 2007 18:39:51 +0000

What if I contribute but make too much money?
Scenario…
Let’s say I am borderline with the cut off of contributing to a ROTH but do not know I will go over the limit for annual income this year. But due to capital gains, inheritance, or some other reason, I do go over. This will put me over the limit for income, but I have already contributed. What happens?

By: tinyhands

tinyhands — Tue, 01 May 2007 17:55:47 +0000

Does a transfer from a Roth IRA to a SEP IRA count as a contribution?
IRS Publication 590- Such a transfer is called a recharacterization and is not treated as a contribution in the tax year of the recharacterization, but the contribution remains applied to the year in which the recharacterized amount was contributed.

That may be confusing, so here’s an example: Say you made a Roth contribution for the maximum amount allowable in November of 2006. That contribution is clearly for tax year 2006. If you recharacterize the contribution in March 2007, you cannot then go make another TY2006 IRA contribution, even though the IRS still allowed contributions to be made for TY2006 until April 17th. You can still make a TY2007 contribution (up until 15 April 2008).

The rule effectively prevents you from “double-dipping” your contributions by recharacterizing them.