401K to IRA to Roth

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L1: 401K to IRA to RothWhile not exactly a 72T question..I was looking at my lack of income in ’04 and came up with a question.
Had no earned income in ’04 (no W2’s). Total income was about $600.00 on interest. It appears that you need enough income to offset “std” deductions, before you can/need to file a return.
I,m sitting on $900K, or so, in a 401K. Wondered if I should have transferred some into a traditional IRA then converted into a Roth?Sort of like: I have about $7.1K in tax “credits” (really unusedstd. deductions) that could be used to offset interest earnings on a partical conversion…so would it be posssible to move about $28K (max?) in a year when you don’t earn any income?
Is thiseven possible? oram I off in left field?
If possible,am I toolate to do anything for last year?Or if this needs to happen over multiple years, then what wouldbe the timing required?
Would appreciate any comments, if you care to reply… Thanks.
2005-02-15 21:32, By: Okie, IP: [4.235.141.254]

L2: 401K to IRA to RothHello Okie:
Well, there is lots of information you didn’t give us so I will make some assumptions: your single, age 55 and have other cash assets at yur disposal. With this in mind, I would, at a minimum, convert $38,000 per year every year usisng up your exemption, your standard deduction as well as the 10% and 15% tax brackets. Total tax due would be approx. $4100 for every conversion done.
Lets say you can invest consistently @ 8%; then the $38,000 will grow to $120,000 in 15 years; 100% tax free. If you leave that same $38,000 in your IRA, it too will grow to $120,000; all of which will be taxed at some relatively higher rate.
As an example, with no conversions, your $900k will grow to $2.85 million in 15 years with a minimum distribution in the 1st year of $104,000 which will put you in the 28% tax bracket. 5 years later, your RMD will be in the $175k to $200k range resulting in the 33% tax bracket.
In summary, this is a tax bracket management problem whcih is best modeled out by year in an Excel or Lotus spreadsheet taking into account all of your particular facts & circumstances. However, IMHO, you must convert regularly and often, it is simply a matter of how much.
TheBadger
wjstecker@wispertel.net
2005-02-15 22:44, By: TheBadger, IP: [66.250.23.21]

L2: 401K to IRA to RothThanks… a bit more info…
Currently single, 53 yrs of age, have around 50K in cash, another 10-15K in savings bonds (tax to yet to be paid), andabout 38K in”taxed” portion of 401K that can be freed up, (this will take a rollof about 100K in untaxed funds to IRA to get full 38K available)… now spending about 24K per yr (this is without a tax load)… Been looking at 72T as a way to “fund” my current “retirement, with thought towards age 54 or 55 to begin that program…l
So my thinking is not as long as 15 yrs out… Might decide to go back to work if something interesting pops up, or the bottom of the barrel becomes more visible…can see glimpses of that from time to time.. For time being want to use what is available on tax side while/if it is there..
Seems like I should go see a CPA, my CFP is not up on “oddball” incomes and taxes…as I take your comments, I still have time to do something for year ’04…
Again, thanks..2005-02-16 11:25, By: Okie, IP: [4.235.159.68]

L2: 401K to IRA to RothHi Okie:
I think you have the makings of a good plan but need to get all of the quirks cleared up before proceeding. The first place to start is your last comment; get a CPA or maybe a tax program to work out how much to convert and the tax liability. It’s really not your CFPs place to do the tax planning unless he is a CPA or professional tax preparer also.
Earlier today I did a quick search in IRS Pub 590 to find out if you could do a Roth conversion before 4-15-05 and have it count for tax year 2004, but I was unseccessful. I think you can but you need to get a definitive answer on this, possibly from Bill or Gordon or your CPA.
Early in this process you should confirm that your 401(k) will allow you to make an unlimited number of partial withdrawals as IRA Rollovers to a traditional IRA. Most will not so you have to do one rollover, then over time do the Roth conversions of whatever amount you wish.
Remember this important point: Each year’s Roth conversion begins a new 5-year holding period beginning 01-01 of the year of conversion. If you had converted a sum any time in 2004, then your holding period would end after 12-31-2008 or on 01-01-2009. Any sum converted in 2005 would have to be held until through the end of 2009 and could be withdrawn 01-01-2010. So, plan how much you will convert and for which year.
Try this plan: Process an IRA Rollover (trustee-to-trustee)of all eligible money from your 401(k). The after tax funds will be sent to you in a separate check. Then from the big IRA, make transfers to other IRA’s; some for Roth conversion and some to set up 72(t) distributions. Timing of the moves is as needed and as long as it’s trustee-to-trustee, there’s no limit how many or how often. If you take constructive receipt of the funds and complete the rollover / transfer withing 60 days, there’s not tax but that money is frozen for 12 months, except for trustee-to-trustee moves. Your CFP will understand this stuff.
Good luck.
Jim2005-02-16 12:46, By: Jim, IP: [70.184.1.35]

L2: 401K to IRA to Rothyour posting struck a nerve, because your circumstances are similar to mine and I did poor 2004 tax planning. (i’m a CPA and should have known better)
unlike funding an IRA, you cannot do an IRA conversion to a ROTH and backdate it tothe previous year. the cut-off is 12/31. anything after that is applied to the next tax year.
with 900k you should consider splitting the total into a few different IRA accounts and designate 1 as your SEPP IRA account. you can calculate the designated IRA size as a function of your anticipated SEPP $ needed. the other IRA accounts can be held on the sideline as – in the Badger’s words “dry powder.” or the bottom of the barrel
it seems that you are doing due diligence and yes you should engage a qualified CPA. recognize that most CPAs don’t understand these issues and therefore you should use caution in deciding upon whom you rely.
good luck
charlie2005-02-16 16:54, By: charlie, IP: [67.226.239.91]

L2: 401K to IRA to RothThanks…thought I might be pushing itin ’05 to do something for ’04 (sort of remember that on earlier IRA conversion from conventional to roth)…perhaps I can swing it in ’05, if I don’t go bust first and have to go back to work….
The comment on finding a “good” CPA strikes at the heart of everything.
I wanted a portable phone to use outside in another bldg…shopped all over, but couldn’t answerwhich would work….finally had to just pick one, buy it,and bring hometo try…in that case I lucked out.
How DO you find a good mechanic, suregon, “partner”, broker,whatever….without taking the “plunge”? Even then how much do you risk to lose based on lack of other’s knowledge, and your ability to qucikly recognize same….?
Oh well, guess that makes life what it is…
Sure glad for this site andfolks that will talk to you…keep it up..
Okie2005-02-17 15:24, By: Okie, IP: [4.235.141.87]

L2: 401K to IRA to RothHello Okie:
If I may be so bold; you have a lot of different issues wrapped up together. Everything frim tax bracket management to SEPP plans to Roth conversions, etc. I would suggest you buy the book available here. The book is admittedly 1st & foremost about SEPP plans but does spend considerable time on all of the related subjects that you are interested in.
Reading the book will at least do two things: (1) open your eyes to various possibilities; (2) arm you with exactly the right questions to ask of the professional you chose to hire (that way you will get to hire the CPA you need & not hire him/her like you bought a phone).
TheBadger
wjstecker@wispertel.net
P.S. In an effort to promote full disclosure, I am the author of the book.
2005-02-17 19:29, By: TheBadger, IP: [66.250.23.21]

L2: 401K to IRA to Rotha few months ago i bought badger’s book. it’s worth every penny.
the only criticism i have is that, within the 150 pages,there are about 6 typos.
you need to buy the book. look on the right side of this home page for details.
additionally, i have discovered that the service reps of the mutual funds i deal with are knowledgeable, if you push them. don’t automatically take their advise but use them as a resource to verify the info you learn. the same is true of the IRS reps but they are my last call.2005-02-17 22:08, By: charlie, IP: [67.240.39.216]

L2: 401K to IRA to RothJim: I read your comment “Remember this important point: Each year’s Roth conversion begins a new 5-year holding period beginning 01-01 of the year of conversion. If you had converted a sum any time in 2004, then your holding period would end after 12-31-2008 or on 01-01-2009. Any sum converted in 2005 would have to be held until through the end of 2009 and could be withdrawn 01-01-2010. So, plan how much you will convert and for which year.”
I’m60 years old andfound this question asked in Ed Slott’s forum on IRA to Roth IRAconversion and I do have a Roth IRA going since 1999. Does your staement above still apply or is the answer to the lower question correct????
Question asked:
A roth account was opened in 1999 with regular : contributions of $2000 in 1999 and $2000 in : the year 2000. In 2004 a roth conversion of : $50,000 was added to the contributory Roth : account. The individual is 61 years old. : What is the length of time that the : individual must wait to take out any of the : earnings from the converted roth account : made in 2004? Must they wait 5 years from : the conversion date or is the roth that was : establised in 1999 already considered to : have been in existence for 5 years?
Answer from an Alan S (CPA)
The 1999 Roth achieved the 5 year period on 1/1/04, and therefore any Roth for that taxpayer has met that requirement. As for the early withdrawal penalty on conversions, that also does not apply once age 59.5 is attained. Therefore, any earnings could be distributed any time after the conversion, but under the ordering rules, the entire amount of regular contributions and conversions would have to come out before earnings are considered to have come out. 2005-02-20 14:08, By: jjkthunder, IP: [68.78.219.143]

L2: 401K to IRA to RothHi jjkthunder. Thanks for your question about Roth distributions. I actually see two questions here and not one, so let me address it in sections. The basic concept for taking money out of a Roth IRA is to leave it alone for 5 years and attain age 59.5, or be disabled, a beneficiary, or buying a home as a first time buyer.۝ The situations you describe mix contributory۝ and conversion۝ Roth IRA’s.
Start by going to http://www.irs.gov/pub/irs-pdf/p590.pdf for the 2004 version of IRS Pub 590, and find Page 58. This is a great resource, next to Bill Steckers book which is available on the 72t web site front page.
1.Contributory Roth IRA: If you started a Contributory Roth IRA anytime in 1998 or by April 15, 1999 for the previous year,۝ then your start date is 01-01-1998. This start date doesn’t change as long as you maintain the Contributory Roth IRA, eventhough you may not make contributions each year. So your earliest penalty-free withdrawal date would be after 12-31-2002 to satisfy the 5-year rule. If you continue contributions until 2020 or later, then your start date۝ of 01-01-1998 doesn’t change.
2.Conversion Roth IRA: A Roth Conversion made within a calendar year has it’s own start date of January 1 of the conversion year. So if you converted one or five or a dozen Traditional IRA’s in 1998, the start date would be 01-01-1998 and the 5-year completion date would be after 12-31-2002. However, Roth Conversions in 1999 would end the 5-year period after 12-31-2003, conversions in 2000 would end the 5-year period after 12-31-2004, and so forth as each newconversion within a different calendar yearoccurs.
Originally the “Contributory” and “Conversions”Roth IRA””s had to be kept separate, but now they can be combined into one account, with some restrictions by certain custodians. Separate helpskeep the books straight but combined has some great benefits too. But, your must keep good records of what money is where.
Review Page 58 of Pub 590 for 2004 where these two situations are spelled out rather clearly. Now that your have started reading on Page 58, keep reading the rest of the book to complete answering more of your questions. In fact, I have to give the IRS Wordsmiths۝ an ataboy۝ for a job well done writing this publication.
Jim2005-02-21 15:03, By: Jim, IP: [70.184.1.35]