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April 13, 2006


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When you have left a former employer, regardless of the reason, one of your options is to roll your 401(k) into an IRA. You can roll it into a Roth IRA. I've done it with one 401(k) account. The downside is that you will pay the income tax on that money in the year you do the conversion to a Roth. And you should be prepared to pay that tax bill out of current income or savings rather than the account itself. I think that is subject to the 10% early withdrawal penalties of the 401(k) you are rolling over.

Don't let it push you into AMT (Alternative Minimum Tax) territory if you aren't already there. It won't be worth it. However, if you find yourself safely below the AMT range, this is a way to contribute a little extra to your retirement. Effectively, you are increasing your retirement savings by the amount of the taxes you are prepaying. You have to consider whether the tax rate will be higher for you now or when you retire.

Under the "advantanges" section the two statements seem to conflict.
First says you "can withdraw your contributions at any time, tax free and without penalty"; second one says "you still can take out the money for your home purchase, but you'll have to pay taxes on it. You won't have to pay the 10% early-withdrawal penalty, though" ...

I think the difference is whether you are withdrawing "contributions" vs earnings ... can you clarify?

That's the difference -- click through to the article to read more.

I love Roth IRAs. I'm really eager to see my company support the Roth 401(k), though -- all the advantages of a Roth IRA, PLUS you can get the same type of employer match, PLUS there's no income limit, PLUS the contribution limit is MUCH higher.

Hard to beat that!

Oh, there's one disadvantage. You can't invest it anywhere you want -- you only get the choices your fund manager provides, just like in a normal 401(k).


um yea, i think the upper limit phasing out is the problem with roth's. say you're married, how many people can really afford to put away 8k making less than 160ish? my wife and i are approaching this barrier @27 and if you wanna buy anything more than a studio in my area, you cant have both.
i also hate the scenarios for this kinda stuff, heck of a lot of assumptions...roth ira's will exist in 40 yrs, govt wont change their mind on it being tax free when you redeem, a 4k limit, the person will never go above the income limit (if you havent noticed the G doesnt adjust anything for inflation, hence AMT hitting middle classers).

i don't understand the paragraph here where it says

"What are the advantages of contributing to a roth IRA fund? Well the obvious ones are tax advantages. Any proceeds or gains you receive from IRA funds are not taxable. "

what do they mean by proceeds or gains from an ira? does ira contributions pay interest, and those are non-taxable?

If you are setting up a Roth with the intent to use it for your first house, it seems as though you wouldn't want to put the max in each year ($4,000) because after 5 years (the required time that you must have the Roth before using for home purchase, you would have $20,000 plus interest and only $10,000 can be deducted for your first home (which seems really crazy). Am I missing something? Why can't you deduct the full amount after 5 years?

You should set up a Roth with the intent to use it for Retirement funds with the option to use a portion of it for a home purchase. If you want to use all of that money for a house, don't put it in a Roth. And the contributions must age 5 years to be considered qualified to avoid the additional tax on early withdrawals. So after 5 years, only the first contribution of $4,000 would be available penalty free.

There is a 6% excise tax on any amount you contribute beyond the allowed amount... so.... If I contribute $5,000 more than allowed (due to having a windfall income this year) that means I'll be taxed $300. So what? The money stays in and earns 5% in a CD for years and years, thus earning back the $300 and much, much more. Therefore, the 6% really isn't much of a penalty at all. Right?

Might make sense if the excise tax were applied once.

Unfortunately it's applied each and every year. Your investment would have to perform really well to overcome a 6% hit every year.

anyone here done a Qualified Retirement Plan Rollover like it says in this article,

A Qualified Retirement Plan Rollover occurs when an individual takes personal possession and responsibility of his IRA assets and does NOT do an IRA Transfer within 60 days. Once the IRA assets are distributed, the plan administrator will withhold 20% of the amount for tax purposes and 80% of the assets will be distributed to the IRA account owner. This complication makes Qualified Retirement Plan Rollovers a less attractive choice.

how complicated did you find this task?

Do you need a financial advisor to open up a Roth IRA or can you open one on your own? If so where is the best place to do this?

No, you don't need a financial advisor to open one. You could even do it online with most banks, or etrade, or I would recommend A financial advisor might help you pick the investments you make within the IRA, but if you're just starting out you'll want to keep it fairly simple as you build it up over a few years. (No-load funds with low annual expenses)

One cannot rollover old 401K into a Roth IRA. I am doing my 2nd right now so I know. At least that's what my broker said. Anyway, I was also told that I can convert this rollover IRA into a Roth after 2 years.

I am confused with the 2 bullets in original blogpost. In the first, the author says, one can withdraw money anytime tax free. In the next bullet, he says only $10,000 can be taken for home purchase tax, penalty free after 5 years. What is correct?

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