401K conversion to Roth or IRA

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Cletus1972
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401K conversion to Roth or IRA

Post by Cletus1972 »

Hi,

My wife and I have $60K in 401K accounts with former employers and I would like to rollover the balances to a Roth IRA or traditional IRA. We have 25 years left until we retire.

Our current financial status is:
$80K - stocks, mutual funds
$25K - cash
$25K - Roth IRA

$0 - credit card debt
$16K - student loan
$300K - mortgage

We are saving about $3000 per month.

My current employer contributes $11K per year for retirement but there is no option for me to contribute more through work.

We both currently work and pay taxes in Australia and qualify for the foreign earned income exclusion and will not have to pay taxes in the USA.

I am trying to determine if we should rollover our entire 401K balance to a Roth and pay taxes or is it better to roll into a traditional IRA. The expenses on the 401K account are very high and the investment options are poor.

If I rollover directly to a Roth, will I be taxed at the rate of my "worldwide income", or since I am not paying taxes in the USA this year, will I just be taxed at the rate based on the amount of money I roll into a Roth?

Thanks,
Cletus
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mhc
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Re: 401K conversion to Roth or IRA

Post by mhc »

Welcome to the forum!

I know nothing about multi-nation taxes.

At a minimum, it sounds like you should rollover your 401k to an IRA. This way you can get the funds you want and reduce your costs.

If the taxes don't get too crazy in converting the IRA to Roth IRA, I would do some each year. You could fill out the 10% bracket and maybe up to the 15% bracket. If you only use the 10% bracket it would take a few years.

Of course I have no idea how your taxes work.
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Kevin M
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Re: 401K conversion to Roth or IRA

Post by Kevin M »

You will get better suggestions if you post in format suggested in Asking Portfolio Questions (see link below).

Kevin
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bertilak
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Re: 401K conversion to Roth or IRA

Post by bertilak »

You should probably download a copy of IRS Publication 590 which is the bible for IRAs, traditional and Roth.
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livesoft
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Re: 401K conversion to Roth or IRA

Post by livesoft »

One can do this in two parts:
1. Roll over to traditional IRA.
2. Convert traditional IRA to a Roth.

So doing (1) is not really a question, is it? So do it. Doing (2) can be decided easily by completing some "what if" scenarios in tax return software.
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Kevin M
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Re: 401K conversion to Roth or IRA

Post by Kevin M »

Agree with livesoft, but my only hesitation in rolling over would be potential for taxes if doing backdoor Roth contributions in the future. Without more info, we cannot evaluate this.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
cathyavl
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Re: 401K conversion to Roth or IRA

Post by cathyavl »

What is the "latest" on the taxability of converting aftertax 401K contributions to a ROTH IRA? I am retired and will be converting my entire 401K.
Alan S.
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Re: 401K conversion to Roth or IRA

Post by Alan S. »

I think you meant you only want to convert the after tax amount. The "latest" is that this is a gray area due to incomplete IRS guidance on isolating your basis such that the post tax goes to the Roth and the pre tax to a TIRA. The IRS issued Notice 2009-68 indicating that pro rating of the basis should apply, but never followed up with 1099R instructions for plan administrators to show the appropriate breakdown on the 1099R forms.

Accordingly, thousand of taxpayers have been able to do tandem direct rollovers to the different IRA types. But there is some risk to this if the IRS issues guidance regarding the 1099R before the end of the year which would change these forms when issued next January. You could gamble and do these direct rollovers or you could use a safer but more inconvenient method. The safer method is supported by the tax code but requires distributions to the EMPLOYEE. The employee then rolls over the pre tax amount FIRST to a TIRA and then the after tax amount to a Roth IRA. While this is easy to do, the pitfall lies with the mandatory 20% withholding on the pre tax portion. Therefore, to complete these rollovers within the required 60 day time period, you must be able to come up with the 20% of the pre tax amount that was withheld. As a retiree, you get this money back by reducing your quarterly estimates or any other withholding or at the latest when you file your return.

Here is further detail on this approach and the entire subject. The above procedure is Strategy 3 in this article:
http://fairmark.com/rothira/09030801-401k-basis.htm
cathyavl
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Re: 401K conversion to Roth or IRA

Post by cathyavl »

thank you for the concise update, Alan. I have been thinking about this strategy since the 2009 Kiplinger article. The fairmark article is certainly the most informative of any I have found in my research. Fidelity and Vanguard are still promoting direct ROTH rollovers. If the IRS does come out with 1099R instructions this year, could I then just recharecterize the ROTH by the tax extension guideline then forever suffer with the comingled pre and after tax money in the TIRA?
FoolishJumper
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Re: 401K conversion to Roth or IRA

Post by FoolishJumper »

Cletus1972 wrote:If I rollover directly to a Roth, will I be taxed at the rate of my "worldwide income", or since I am not paying taxes in the USA this year, will I just be taxed at the rate based on the amount of money I roll into a Roth?
I'll leave some of the other investing points for others around here, but your taxes are based on your worldwide income, as you pay any U.S.-source income (of which IRA rollovers are one) as a last dollar basis, so your tax-free earnings fill the bottom brackets and anything taxable is considered as the last dollar made. This used to be different pre-2006, but the foreign-income loopholes were all closed with the Tax Increase Prevention and Reconciliation Act of 2006. Was nice while it lasted, but I do have to agree with the concept.
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