401K to Roth IRA - tax implications?

Question

question for the CPA's who are in the tax practice.

I've got $35K in an former employers 401K (left that employer two years ago). Correct me if I'm wrong, but won't I pay taxes on the whole amount of distributions received when I retire (original contributions AND on the earnings)? (I've still got 24 years until retirement).

As opposed to a ROTH IRA, where I pay no taxes on distributions recieved at retirement (earnings are totally tax-free)?

What are the tax implications if I roll this 401K over into a ROTH IRA in 2008?

Thanks for any info you can provide!

P.S. my MAGI IS less than 100K/year.

Answer 1

You are correct in stating that you will pay income taxes on all distributions (boh your contributions and earnings) from your 401k.

You are correct in stating that you will pay no income taxes on distributions from a Roth IRA, as long as they are qualified distributions (which they likely will be when you retire).

You can convert your 401k directly into a Roth IRA (used to have to go through a traditional IRA but the rules changed). When you do so, you will pay income tax at the time of the conversion. Then, you have to let that money sit in the Roth IRA for five years before you can take distributions of the converted money tax-free. And at retirement, all qualified distributions are tax-free.

Pick the financial institution where you want the Roth IRA, and they will glady provide you with the paperwork for the conversion. When you do your 2008 taxes, you must record this conversion on your tax return.

If your income is over $100,000 in 2008, you will not be allowed to do the conversion. However, in 2010, there are no income limits and you can proceed.

Answer 2

You can't.

You can roll the 401K to an traditional IRA (tax free) and then begin rolling the traditional IRA to a ROTH IRA (no penalty, but you will pay the income tax). If you have a year with low income and can pay the taxes with other funds, this is doable. I've rolled money over whenever I still have room in the 15% tax bracket. (Each rollover has it's own 5 year clock. If you take the funds before then and before you are 59.5, you will owe a 10% penalty. Any subsequent earnings will be taxed as income as well.)

If you haven't rolled the 401K over to a traditional IRA yet, you may discover that there isn't enough time to do this in 2007.

Answer 3

Contributions to a Roth IRA are made with after-tax dollars, that's why distributions are tax-free at retirement. Your best bet is to roll it over into a traditional IRA because contributions to those are made with pre-tax dollars, just like your 401(k). With so much money on the line you should call a CPA to confirm whatever people tell you.

Answer 4

Any money withdrawn from a 401K will be subject to taxation and at your age (over 59-1/2), you do not need to worry about the 10% penalty for early withdrawal. Any monies withdrawn from a Roth IRA will not be subject to taxation under any circumstance.