K’nex (Photo credit: -Snugg-) Employers have been giving us lots of opportunities to make this decision of late: when leaving an employer, whether voluntarily or otherwise, we have the opportunity to rollover the qualified retirement plan (QRP) such as a 401(k) from the former employer to either an IRA or a new employer’s QRP. This decision shouldn’t be taken lightly – although often it is the best option for you. Moving to an IRA gives you much more control over your destiny, so to speak, by allowing you to choose from the entire universe of allowable investment choices. Using your new employer’s QRP can give you a better sense of control over the account as well, although the flexibility of an IRA is generally preferable to another QRP. But sometimes it makes the most sense to leave your money in the old plan. Listed below are eight possible reasons that […]
Roth Conversion
Ordering Rules for Roth IRA Distributions
Tax (Photo credit: 401K) Did you know that there is a specific order for distributions from your Roth IRA? The Internal Revenue Service has set up a group of rules to determine the order of money, by source, as it is distributed from your account. This holds for any distribution from a Roth account. Ordering rules First, over-contributions or return of your annual contribution for the tax year. This means that if you’ve made a contribution to the Roth IRA in the tax year, the first money that you withdraw from the account will be the money that you contributed that year. If you over-contributed to your account a prior year. Growth on this over-contribution or annual contribution needs to be removed at this time as well, with tax and penalty paid as required. Second, regular annual contributions to the account. The next money that comes out is the total […]
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Converting an Inherited 401(k) to Roth
Image via Wikipedia One of the provisions that is available to the individual who inherits a 401(k) or other Qualified Retirement Plan (QRP) is the ability to convert the fund to a Roth IRA. This gives the beneficiary of the original QRP the option of having all of the tax paid up front on the account, and then all growth in the account in the future is tax free, as with all Roth IRA accounts. What’s a bit different about this kind of conversion is that, since it came from an inherited account, the beneficiary must take distribution of the account over his or her lifetime, according to the single life table. This means that, in order for this maneuver to be beneficial, the heir should be relatively young, such that there will be time for a lengthy growth period for the account – making the tax-free nature of the […]
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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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Enabling a Tax-Free Roth Conversion With a Mixed-Contribution IRA
Image by @dino via Flickr If you have an IRA that includes contributions that are both pre-tax and post-tax (deductible and non-deductible) as well as growth, you may have an option available to you that will allow for a tax-free Roth conversion. As you know, a Roth conversion can be done with IRAs that have mixed contributions, but when this is done, you will owe tax on a portion of the rollover – the portion that includes the pre-tax money. Even if your pre-tax money is in a totally separate traditional IRA, the conversion of your post-tax money will be partly taxed due to the cream-in-the-coffee rule, which requires that all IRAs be considered as one with regard to distributions (including Roth conversions). If you happen to have a 401(k) plan (or other Qualified Retirement Plan) that you’re participating in, you may have the option available to roll over your […]
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Is It Really Allowed – Making a Non-Deductible IRA Contribution Followed By a Roth Conversion?
I occasionally receive this question: Can I make a non-deductible IRA contribution, and then shortly after convert the IRA into a Roth IRA? My income is too high for me to make a contribution directly to a Roth IRA. Image by Plbmak via Flickr According to the rules in place today, you can do this. Here are the applicable rules: There is no income limit for an individual to make a non-deductible IRA contribution. There is no income limit for an individual to make a Roth Conversion. There is no time limit on how long a contribution must be in a traditional IRA before converting it to a Roth IRA. Essentially this situation provides the individual with an income above the limits to contribute to a Roth IRA with an avenue to accomplish the funding of a Roth IRA. It seems too good to be true. And even though you […]
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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®
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