Replies to post #14721 on The Black Box

[dieselfuel]

That's very tricky and I'm no expert.

From my understanding, if you leave your employer, and roll it over, you have to pay taxes the part that you put in that was tax free. What you earned, you don't pay taxes on.

It's hard to find good info on this subject.

I researched it a few months ago, and figured I'd do better if I rolled over the 401k now into a Roth.

The distrubution at retirement is tax free on the Roth.

Do your own DD and seek tax advice from an accountant or another expert in this field.

I know one thing though: If you take a lump sum from your employer, they are required by law to withhold 20% and to pay the govment'.

That doesn't sit well with me. If your employer decides they're not going to pay the taxes, you're still liable.

By the way, if your employer withholds (as they should) taxes from your paycheck, and they don't pay the tax bill, guess who the IRS goes after?

YOU!

That happened to a friend of mine. He had to "pay" the taxes twice.

[ragman]

Lurker99, Twice in the last 5 years I haven't closed out my 401K and rolled it over to an IRA. I paid no taxes on my or my employer's share, but I'm quite sure that if you roll it over into a Roth IRA that taxes will be due on the whole amount.

"they are required by law to withhold 20% and to pay the govment'." This can be avoided by sending the rollover directly to the IRA. The brokerage firm, will usually supply you with the paperwork. I use one of the large firms and I do quite a bit of trading in this account. Because of the volume of trades I get what I think is a very fair rate. ($8 per trade)

Hope this helps but I agree with Diesel, check with an accountant or another expert in this field.

Jim

[ragman]

Deleted

[Huluriasquias]

Lurker,

you can find comprehensive information doing a search in Google.com for "Roth IRA" regretfully those sites seem to be written by the same people who did the IRS forms instructions. <ng>

I did a 401(k) distribution several years ago and if memory serves (an increasingly unlikely proposition as years pass by...) these are the main pointers:

- You cannot go directly from a 401(k) to a Roth Ira.

- You have to go from 401(k) to a Regular IRA first. (And you pay no taxes doing this, but make sure it's a direct transfer: if you receive a check you are prone to lots of problems if you don't do exactly the "right thing")

- Later you can transfer from IRA to Roth IRA. There are several restrictions: a) only once a year, b) adjusted income less than approx. $100K for married couples. c) probably some more, minor ones.

When you transfer from IRA to Roth IRA the WHOLE amount of the transfer is taxed as earned income. (And it's counted in determining the $100K adjusted income I mentioned before. --Most unfair if you ask me)

Same as everybody else I'm no expert in this subject, so make sure you do your due diligence.

Good luck!

H.

Note: When you are moving from IRA to Roth IRA you are basically paying taxes now on your savings in order no to pay taxes in the future on both savings, and subsequent gains.
The government lets you get all your future earnings tax free in exchange of "early payment" of the tax you were deferring in your current IRA.