Back in 1978, the year of 3 popes, Congress passed the Revenue Act of 1978 which included a provision that became Internal Revenue Code section 401(k). The 401(k) has roots going back several decades earlier, with many different rulings (Hicks v. US, Revenue Ruling 56-497, and Revenue Ruling 63-180, among others), providing the groundwork for the specialized tax treatment of salary deferrals that Section 401(k) enabled. More groundwork for the 401(k) as we know it was laid with the passage of the Employee Retirement Income Security Act (ERISA) of 1974, in that the Treasury Department was restricted from putting forth a particular set of regulations that would have reduced or eliminated the tax-deferral benefits of deferred compensation plans. After the Treasury Department withdrew the proposed regulations in 1978, the way was cleared to introduce the 401(k) plan with the Revenue Act. This particular section of the Code enabled profit-sharing plans […]
Roth Conversion
Ideal Roth Conversion Candidate – Protecting Non-Taxation of SS Benefits
This is the second in a series of posts about Ideal Roth Conversion Candidates. See the first post, Low or Zero Tax, at this link. One of the planning options that most all folks have available to them is the Roth IRA Conversion. For the uninitiated, a Roth IRA Conversion is a transaction where you move money from a Traditional IRA or a Qualified Retirement Plan (QRP) such as a 401(k) into a Roth IRA. With this transaction, if any of the funds in the original account was pre-tax, that amount would be included in income as potentially taxable in the year of the Conversion. As you might expect, making a decision like this can result in a considerable tax impact, depending on the individual circumstances. A Roth IRA Conversion may make a great deal of sense for one individual, while another may decide that the Conversion cost is too […]
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Ideal Roth Conversion Candidate – Low or No Tax
One of the planning options that most all folks have available to them is the Roth IRA Conversion. For the uninitiated, a Roth IRA Conversion is a transaction where you move money from a Traditional IRA or a Qualified Retirement Plan (QRP) such as a 401(k) into a Roth IRA. With this transaction, if any of the funds in the original account was pre-tax, that amount would be included in income as potentially taxable in the year of the Conversion. As you might expect, making a decision like this can result in a considerable tax impact, depending on the individual circumstances. A Roth IRA Conversion may make a great deal of sense for one individual, while another may decide that the Conversion cost is too great for the result. Detailed below is one specific circumstance that indicates a Roth IRA Conversion is a good move – although each individual needs […]
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When Is a Roth IRA Subject to Income Tax?
Elaine Roth (Photo credit: Wikipedia) Ah, the Roth IRA. That single bastion of non-taxable money in our arsenal of accounts. When you have investments in a Roth IRA, you can take the money out tax-free, right? Not always. There are several situations where a Roth IRA’s monies can be subjected to tax, penalty, or both. Listed below are some of those circumstances. When a Roth IRA is Taxable It should be noted that contributions to a Roth IRA may always be withdrawn from the account tax-free, for any purpose whatsoever. There are no restrictions on these withdrawals. 1. Taking the money out of the account within the first five years of the account’s existence can result in taxation of a portion of the funds. The portion that is taxable is any withdrawal that exceeds the total of all contributions and conversions into the account. This rule applies without exceptions. 2. […]
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A Tax-Free Roth Conversion Question of Timing
Fern Overgrowth (Photo credit: MightyBoyBrian) We’ve discussed here in the past about how it is (at least under present law) a perfectly legal maneuver to make a non-deductible contribution to a traditional IRA and then at some point later convert the same contribution to your Roth IRA (see Is it Really Allowed? for more). If you have no other IRA accounts, this conversion to Roth can be a tax-free event, especially if there has been no growth or gains in the investments in the account. However (and there’s always a however in life) I recently came across a situation that was sent to me by a reader, where he wanted to do such a conversion, but he also wanted to rollover some money from his 401(k) plan into an IRA. The question is in the timing – understandably, if he does the conversion from the traditional IRA to the Roth […]
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Roth Conversion/Recharacterization Strategy
Image via Wikipedia 1/1/2018 Note: Recharacterization of Roth conversion is no longer allowed as of tax year 2018. The last tax year that you could recharacterize Roth conversions is 2017. See Roth Recharacterization is No Longer Allowed for more details. If you have an IRA you probably know about the concept of a Roth IRA conversion – where you take distribution of a portion of your IRA and directly transfer that money into your a Roth IRA, paying tax as you go. Then the Roth IRA can continue to grow tax-free (as Roth IRAs do) and you’ll never owe tax on your qualified distributions from the Roth IRA. In addition, if the investments you’ve made in the Roth IRA have lost money, before October 15 of the following year you have the opportunity to recharacterize your Roth conversion. If you didn’t recharacterize, you’d be paying tax on a conversion amount […]
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Re-Converting Your IRA
Image by accent on eclectic via Flickr Okay, so we’ve covered Roth Conversions – where you distribute the funds from your traditional IRA to a Roth IRA. Then we covered Recharacterizations – where you can “undo” the conversion by moving all or part of the converted funds and the earnings associated with it back into a traditional IRA. The end result is that, for those funds converted and recharacterized, from the eyes of the IRS, nothing happened to the account (except that you may have put the money back into a different IRA). So, if you went through a Roth Conversion and then Recharacterized it, the assumption is that you wish to eventually re-convert those funds to a Roth account. When are you allowed to do this? There are two limits on the Re-Conversion of funds to a Roth account once they’ve been through the Conversion/Recharacterization wringer: This first limit […]
Sterling Raskie, MSFS, CFP®, ChFC®
The latest in our Owner’s Manual series, A 401(k) Owner’s Manual, was published in January 2020 and is available on 
A Medicare Owner’s Manual, is updated with 2020 facts and figures. This manual is available on 
Social Security for the Suddenly Single can be found on Amazon at 
Sterling’s first book, Lose Weight Save Money, can be 
An IRA Owner’s Manual, 2nd Edition is available for purchase on Amazon. Click the link to choose the 
Jim’s book – A Social Security Owner’s Manual, is now available on Amazon. Click this link for the 
And if you’ve come here to learn about queuing waterfowl, I apologize for the confusion. You may want to discuss your question with Lester, my loyal watchduck and self-proclaimed “advisor’s advisor”.