rollover 401k to Roth IRA and withdraw from Roth IRA
rache...@hotmail.com
and then immediately taking out the money from the Roth IRA (I'm not
yet age 59.5). (I'm aware of the long-term investment implications for
retirement).
1. When I rollover to the Roth IRA, do I pay taxes but no 10% penalty,
i.e. is the rollover considered a contribution, and thus when I
withdraw from the Roth IRA I'm withdrawing only contributions since
there are no earnings in the day or two the money sits in the Roth
IRA?
2. Can I rollover more than the $5000 a year limit on Roth IRA
contributions?
3. Is there any difference between rolling over from a traditional
401k to Roth IRA, vs. from a Roth 401k to a Roth IRA, for purposes of
this question (except that I wouldn't pay taxes on the rollover, since
I already paid taxes on the Roth 401k contributions).
Thanks.
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Mark Bole
> I'm considering rolling over some of my traditional 401k to a Roth IRA
> and then immediately taking out the money from the Roth IRA (I'm not
> yet age 59.5). (I'm aware of the long-term investment implications for
> retirement).
>
> 1. When I rollover to the Roth IRA, do I pay taxes but no 10% penalty,
> i.e. is the rollover considered a contribution, and thus when I
> withdraw from the Roth IRA I'm withdrawing only contributions since
> there are no earnings in the day or two the money sits in the Roth
> IRA?
No, it's considered a conversion, and the holding period for
penalty-free withdrawals on a conversion is five years (separate
five-year clock for each conversion). In your scenario, you will pay
both taxes and penalty if you immediately withdraw the money, so there
is no point in first converting to a Roth.
Think about it: your desired scenario is too good to be true, otherwise
probably millions of people would do the same thing -- raid their
tax-deferred retirement accounts while avoiding their side of the deal,
which was to keep the money set aside until retirement.
> 2. Can I rollover more than the $5000 a year limit on Roth IRA
> contributions?
You can convert (not rollover) up to 100% of your Trad. IRA or 401k,
under the new rules in 2010 which eliminate the high-AGI restrictions.
The income tax on the conversion in 2010 by default is spread 50% each
over 2011 and 2012, I'm not sure if that is affected by an early
withdrawal. I suspect the 10% penalty (plus, for example, 2.5% state
penalty in CA) is due in for the current tax year regardless.
-Mark Bole
Alan
> rache...@hotmail.com wrote:
>> I'm considering rolling over some of my traditional 401k to a Roth IRA
>> and then immediately taking out the money from the Roth IRA (I'm not
>> yet age 59.5). (I'm aware of the long-term investment implications for
>> retirement).
>>
>> 1. When I rollover to the Roth IRA, do I pay taxes but no 10% penalty,
>> i.e. is the rollover considered a contribution, and thus when I
>> withdraw from the Roth IRA I'm withdrawing only contributions since
>> there are no earnings in the day or two the money sits in the Roth
>> IRA?
>
> No, it's considered a conversion, and the holding period for
> penalty-free withdrawals on a conversion is five years (separate
> five-year clock for each conversion). In your scenario, you will pay
> both taxes and penalty if you immediately withdraw the money, so there
> is no point in first converting to a Roth.
No taxes, just the 10% penalty on the Roth IRA withdrawal (OP
stated that she was under age 59 1/2). Under the ordering rules
the taxpayer would be withdrawing an amount that was already
taxed at the time of the conversion. Only if she withdrew
earnings during the 5 year period, would she pay income tax.
>
> Think about it: your desired scenario is too good to be true, otherwise
> probably millions of people would do the same thing -- raid their
> tax-deferred retirement accounts while avoiding their side of the deal,
> which was to keep the money set aside until retirement.
>
>> 2. Can I rollover more than the $5000 a year limit on Roth IRA
>> contributions?
>
> You can convert (not rollover) up to 100% of your Trad. IRA or 401k,
> under the new rules in 2010 which eliminate the high-AGI restrictions.
She can convert the whole plan this year under the old rules. She
would just have to watch out for the current AGI limits (MAGI of
$100,000 or less).
Mark Bole
>> No, it's considered a conversion, and the holding period for
>> penalty-free withdrawals on a conversion is five years (separate
>> five-year clock for each conversion). In your scenario, you will pay
>> both taxes and penalty if you immediately withdraw the money, so there
>> is no point in first converting to a Roth.
>
> No taxes, just the 10% penalty on the Roth IRA withdrawal (OP stated
> that she was under age 59 1/2). Under the ordering rules the taxpayer
> would be withdrawing an amount that was already taxed at the time of the
> conversion. Only if she withdrew earnings during the 5 year period,
> would she pay income tax.
Yes. I should have said, "you'll pay both taxes (on the conversion) and
penalty (on the early withdrawal of converted amount)". My point
was, there *is* no point here in doing a conversion first, it's needless
overhead if the five-year waiting period won't happen.
rache...@hotmail.com
> Alan wrote:
> >> No, it's considered a conversion, and the holding period for
> >> penalty-free withdrawals on a conversion is five years (separate
> >> five-year clock for each conversion). �In your scenario, you will pay
> >> both taxes and penalty if you immediately withdraw the money, so there
> >> is no point in first converting to a Roth.
>
> > No taxes, just the 10% penalty on the Roth IRA withdrawal (OP stated
> > that she was under age 59 1/2). Under the ordering rules the taxpayer
> > would be withdrawing an amount that was already taxed at the time of the
> > conversion. Only if she withdrew earnings during the 5 year period,
> > would she pay income tax.
>
> Yes. �I should have said, "you'll pay both taxes (on the conversion) and
> � �penalty (on the early withdrawal of converted amount)". �My point
> was, there *is* no point here in doing a conversion first, it's needless
> overhead if the five-year waiting period won't happen.
>
OK, thanks. If I convert $20000 from a traditional 401k to a Roth IRA
(paying taxes on the $20000 in the year of conversion), and then take
out this $20000 (ie. contributions only, not earnings) from the Roth
IRA immediately, do I pay 10% penalty? Do I avoid this 10% penalty if
I leave the $20000 in the Roth IRA for 5 years, or if the $20000 goes
to pay
for college for my child?
(I'm trying to think of some way to get my employer's 401k match and
also use the
401k money to pay for college, hence all these questions.) Thanks.
Alan
before turning age 59 1/2 unless you meet any of the exceptions
identified in Pub 590. Paying for qualified higher education
expenses for your child is one of the exceptions. If you wait for
the requisite 5 year conversion period to elapse before taking
the distribution, you avoid the 10% penalty on any distribution
that represents the amount converted. If at that time, you are
still not yet 59 1/2, the distribution is not a qualified
distribution. As such, any amount distributed that represents
earnings would be subject to tax and penalty unless you are able
to meet one of the rules that makes the distribution qualified
(e.g., you are disabled).
Mark Bole
> OK, thanks. If I convert $20000 from a traditional 401k to a Roth IRA
> (paying taxes on the $20000 in the year of conversion), and then take
> out this $20000 (ie. contributions only, not earnings) from the Roth
> IRA immediately, do I pay 10% penalty? Do I avoid this 10% penalty if
> I leave the $20000 in the Roth IRA for 5 years, or if the $20000 goes
> to pay
> for college for my child?
>
> (I'm trying to think of some way to get my employer's 401k match and
> also use the
> 401k money to pay for college, hence all these questions.) Thanks.
Before you go any further, I strongly recommend reviewing the rules for
your employer 401k plan with your HR department. Are you sure they will
let you take anything out at all as long as you are still an employee?
Other than possibly a loan, I don't think most employers will let you
withdraw 401k money unless you leave the company. It really is intended
for retirement, not educational expenses.
As a financial planning item, remember that your child can get loans for
higher education; you can't get a loan for retirement. Depleting your
retirement funds prematurely could be a big mistake. There is another
moderated group, misc.invest.financial-plan, where you could provide
more of your overall financial picture and solicit advice on best ways
to pay for a child's education.