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    cwerdna Senior Member

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    I have some dumb questions since I'm 37 and WAY far away from retirement. To make a long story short, if I were to rollover my old 401(k) (left that job in late 2010) to an IRA, is doing it to a traditional IRA the correct one to choose? I guess I could choose a rollover IRA (if provided as a choice at the target), but there wouldn't be any difference other than the those funds can be rolled back into a future 401(k), if desired, right? (I don't see any really good reason to.)

    All the contributions into it were employee (me) pre-tax or employer match.

    Unfortunately, I called Fidelity about my old 401(k) and there's no way to move over just a part of it (like the cash). They have to liquidate in the ENTIRE 401(k), even if it's going into a Fidelity IRA (I'm moving it to another brokerage). Should I care about the cost basis of the positions in my 401(k) from a tax point of view or does it not matter? (One might care from a performance point of view.)

    From what I've heard, when one reaches retirement and takes 401(k) distributions, the distributions you take are taxed as ordinary income, as if the cost basis was $0 anyway. Is this correct? Would this still be the case if I rolled it over to a traditional IRA?

    If you guys can point me to some reputable sources (even better if they have examples) to backup your answers, that'd be great!
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    HaveNoCents Conservative Tree Hugger

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    At your age the best thing to do is roll it over into a Roth account. You will have taxes to pay for this year, but you will NEVER have to pay taxes on it again for any reason.


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    cwerdna Senior Member

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    I already rolled over my traditional IRA into a Roth in 2011 and I know I'll owe a whole bunch of taxes due to that.

    If I roll my old 401(k) into a Roth IRA, I believe I'll have a HUGE tax bill that will deplete quite a bit of my cash. I was working at that (technology) company for >13 years, earning a decent salary and for almost the entire time there, maxed out my 401(k) contributions at 15% (and got 3% of free money on top, due to matching).
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    MJFrog Active Member

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    The only dumb questions are those that are never asked (but should be).

    There are only two types of IRAs - Traditional and Roth. A Rollover is a transaction, not a type of IRA. The target IRA may be referred to as a Rollover IRA, but it is either Traditional or Roth. If you roll into a Roth IRA, you will be taxed on the entire rollover amount as ordinary income, but you won't incur the 10% early withdrawal penalty. Depending on the size of the rollover, this can be VERY expensive. If I were you, I would NOT roll into a Roth IRA.

    You're mixing apples and oranges, or rather Traditional vs Roth IRAs. Distributions from a Traditional IRA are taxed as ordinary income (assuming they are made after age 59 1/2). Distributions from a Roth IRA are (Federal) Tax free because the money you put INTO them has already been taxed.

    Go to IRS.gov and look up the publication(s) on IRAs.
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    sub3marathonman Active Member

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    I don't think that is necessarily the best advice. Each situation is different and needs to be analyzed. What if he got a huge bonus at work this year? What if his tax bracket when he retires will be low anyway? You need to look at everything.

    My somewhat unusual suggestion is to think about taking the IRA, paying the penalty, and paying down on a mortgage. It might be the difference between being able to refinance a 6.5% mortgage to a 4.5% mortgage or staying stuck at 6.5%.

    And when somebody says that advice is crazy, I say it might be for some people, but for others it might not. That's why you have to do the math.
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    fuzzy1 Senior Member

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    There is a special option for taking out your employer's stock from the 401k, for which you need to know a cost basis at which it was acquired. There are a number of restrictions -- e.g. you must not have been trading back into the employer's stock from within the account -- that could make this option unavailable. If you do qualify, I believe it allows you to pay ordinary income tax on only the cost basis, and capital gains tax on the increased value. But I'm not yet to the age to exercise this option, so don't know the full details. And if Congress ever gets serious about fixing the national budget, the preferential tax rate for capital gains will be abolished. Again. (It vanished during the Reagan years, but returned later.)

    For the other positions in normal accounts (not Roth, no after-tax contributions), the cost basis is irrelevant, they are all $0. But rules keep changing and more options getting added, so I could be behind the times.
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    wjtracy Senior Member

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    CWERDNA- I hate to admit I am a little older than you, 39 years old.:cool: I am still putting into IRA's but getting close to taking out.

    >Yes Traditional IRA rollover/withdrawals are taxed as normal income. However, one important exception is if you have company stock there is a provision called NUA that is tax advantaged. So if you worked for Apple and your old stock is heading for the $1000/share you may want to make sure you understand this. If you just have a bunch of funds then they are all lumped. My wife's 401K was in Fidelity so I sort of know some of the funds you may in there.

    > As far as cost basis, I don't think it makes too much difference if all of your money was Before Tax basis. But if you have added some After Tax money that is important as part of the NUA thing above. Also of course you are not double taxed on After Tax withdrawls.

    I also did some Traditional-to-Roth conversion in 2010 and paying for it now, like you said. I have a couple of Rollover iRAs so let me know any more questions. I do not charge but results not guaranteed.
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    HaveNoCents Conservative Tree Hugger

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    If he got a big bonus this year then he can roll it over into a Roth next year, or the year after. It doesn't matter he has almost 30 years until retirement which is plenty of time to end up in a great financial position. Paying no taxes in the future with 30 years until retirement will always be the better choice simply because of the time element.

    What is more important is you never know how much longer the government will even allow Roth accounts in the future. It is far better to get as much money as you can in there before the privilege is taken away.




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    cwerdna Senior Member

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    Fool.com: All About IRAs - The 11 Types lists rollover as a type. http://priuschat.com/forums/freds-house-pancakes/86756-two-very-easy-ira-questions-i-think.html encountered a rollover IRA as well.

    Yes, if I rollover my entire 401(k) into a Roth IRA, I will have a HUGE tax bill.
    If I left the 401(k) as took distributions at retirement, it'd be taxed like a traditional IRA, right? In other words, it's as if my cost basis was zero and they don't care about the delta between total amount contributed and the final value, right?
    Right, I see what you're saying about the current and future tax situation. It's unknown what future tax rates will look like, so choosing to roll into a Roth vs. a traditional is a gamble, either way except that I'd owe a ton of taxes for 2012, if I chose Roth.

    No, I definitely won't go w/the unusual suggestion. I don't own a house and don't have a mortgage.
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    cwerdna Senior Member

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    Yeah, I saw something about that and didn't think it'd matter for me. I literally have <$4K in my former company's stock in my 401(k). That's a TINY fraction of the total 401(k), and the company's stock in question has hardly moved for over a decade, except recently.

    No, I've never worked for Apple.
    Ahh, yeah, IIRC, you did it at a time when you could spread that ax burden out over a few (two) years, right? That's expired now, IIRC, thus moot for me.
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    wjtracy Senior Member

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    Nor me...

    OK good so ignor the NUA thing and you can go to a Rollover IRA. I like Fidelity and Vanguard for differerent rollover situations.
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    sub3marathonman Active Member

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    Oh, Wow. OK, I didn't think about that. And yes, it doesn't matter, he's got 30 years to make up any loss if it is the wrong decision. I didn't realize that "Paying no taxes in the future with 30 years until retirement will always be (bold added) the better choice simply because of the time element."

    So OK, don't do any math. Don't think about different possibilities. Just always switch everything to a Roth IRA. Remember, the government MIGHT not allow them in the future. Of course, who's to say the government won't say they're not tax free anymore either at some point in the future.

    And, just as a disclaimer in case anybody wants to sue me for this obviously questionable tax advice that agrees with HaveNoCents (is that an irony?), please understand that I'm not a tax attorney, and this "advice" is submitted in an attempt to point out the ridiculousness of saying always when it comes to taxes.
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    M8s Retired and Lovin' It

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    My advice?

    Listen to MJFrog. Everything he said is correct.
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    JimboPalmer Tsar of all the Rushers

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    Silly question 1) why move it at all?

    To get a down payment on my house, I moved my retirement from a company 401(k) with Fidelity to an IRA with Fidelity. The specific 401(k) did not allow me to withdraw money at no penalty for a down payment and an IRA does. (It is taxable income when I withdraw it, but no 10% penalty) Keeping my money out of the hands of the IRS for another 5 years is a worthy goal in my mind.

    Silly question 2) Roth or traditional?

    Is your income tax rate now higher than when you retire? Then I would want traditional, if it is lower now, Roth makes sense to me.

    I tend to never look at my retirement moneys, as it only agitates me. But unlike some, my investments have grown 25% since 2006, so I am pretty happy with Fidelity.
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    HaveNoCents Conservative Tree Hugger

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    The math has already been done. This is not just a tax issue. It's a financial planning issue. Most certified financial planners would give the same advice

    If you want to make fun of my choice of names that's fine. Yes it is ironic and it is exactly the reason why I chose the name. Don't make fun of someone financially when you have no clue about their financial net worth, and how they acquired that net worth.

    As far as the government is concerned you pretty well can be sure that when it comes to a Roth those that already have a Roth will be grandfathered in.

    I wish I could have had a Roth, but both fortunately and unfortunately I have always made more money than was allowed to be eligible.

    Ira's should be for retiring only, not medical, not to save interest, not for education, but for investing for you retirement. The quicker people realize that, the faster they will be able to retire. And yes I know education can be an investment, but you are still better off to contribute a little less money to your Ira than to ever take any money out of it, unless of course you have 6 months to live in which case it's all moot.

    And just for the record, I am retired at 61, and have been for the last 4 years. If a Roth had no income limitations and if existed 35 years ago, I am certain I could have retired more than 10 years ago.

    Whether someone follows this advice, or not will have no impact on me whatsoever, but it could have a significantly positive impact on someone with more than 30 years until retirement.


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    HaveNoCents Conservative Tree Hugger

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    wjtracy Senior Member

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    ....that sounds like a good reason, Jimbo. The only reason I know for not rolling over, and it is important, is if you like the investment choices inside your plan. In particular Stable Value Fund cash option can be decent. However when my wife was in Fidelity her company changed over to another company, I realized the Fidelity stable value fund was lower rate compared to her new one and mine, both have since fallen off to ~2.5% but OK for cash these days.
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    ualdriver Member

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    I'd like to add a few things to the discussion.

    First of all, no one has mentioned HOW to do the rollover unless I missed a post, and this is VERY important. I would suggest that if you decide to rollover the funds from a previous custodian to a new one that you do a TRUSTEE TO TRUSTEE rollover or also referred to as a direct rollover. Usually the receiving custodian will handle the details of this rollover after you fill out the appropriate paperwork. I just did one last year and Vanguard did it without problem.

    If you have your previous custodian just "mail you a check" so that you can do the rollover yourself, they have to withhold 20% of the amount for taxes per IRS regs (see PUB 590 and do a keyword search on "20%" without the quotes).

    Here's the problem. Even though your previous custodian withholds 20% for federal taxes, you are REQUIRED to contribute the entire original amount to the new IRA custodian within 60 days or you will owe taxes and penalties on the shortfall. So if you're transferring a large 401K, you may have to come up with thousands of dollars in order to avoid that penalty and interest until you can get that 20% withholding back when you complete your taxes for that year. That's a very big "gotcha" that catches many people off guard. And if they don't have the cash to cover that 20%, well then you're stuck paying taxes on earnings and a 10% penalty to boot!

    When you do the trustee to trustee rollover (hopefully!), you will receive a 1099-R. Make sure that you get one and that the appropriate boxes are checked and filled in to indicate that you have a non-taxable transaction. In particular, box 2a should have a zero in it!

    The hand wringing between contributing to a Traditional IRA and a Roth IRA makes for interesting discussion, but to me it's kind one of those "measure with a micrometer, mark with a crayon, cut with an axe" type analyses. Financial planning is important, don't get me wrong, but the bottom line is no one knows what taxes are going to be in the future and at best we can make only rough estimates about the future even though we measure and plan financial performance to decimal points in the short term. Even if you think you'll make less income in retirement, maybe taxes rates will be higher so planning on paying less in taxes in the future maybe won't be accurate. Who knows? What do I do? I hedge my bets. When me and the Mrs. save for retirement, I put half in Roth type investments and half in pretax type investments. My crystal ball is really cloudy.

    Another interesting thing to consider is this: When you are talking PRETAX money and deciding whether to put money in a deductible tax deferred vehicle (like a 401K or deductible traditional IRA) or a post tax deferred vehicle (like a Roth 403b or Roth IRA) it matters not one whit whether you put it in the currently deductible vehicle or the Roth vehicle if your marginal tax bracket will be the same at the time you make the contribution and when you make the corresponding withdrawal at retirement (all else being equal). You'll end up with the same after-tax money whether you use a Roth or a deductible vehicle. So if you think you'll be kinda/sorta in the same-ish tax bracket when you retire as you are now, you can't really make a wrong choice.
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    cwerdna Senior Member

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    For me, it's mainly to get Investools training credit (it's a promo) for moving money in. I'm not that tied down in my current 401(k) at Fidelity. I have Brokeragelink there so they let me trade virtually any stock, ETF or mutual fund other than that of my old company. Unfortunately, Fidelity turned me down for the lowest level of options trading there (looking to sometimes do covered calls or cash secured puts).

    If I move it over to TD Ameritrade, they might be more open to allowing me options trading in that IRA since I already have the highest level of options access in my regular account w/them.

    ualdriver: Thanks for the advice. Yeah, I'd read about that cutting a check, 20% withhold and having to cough up 20%, etc. business. I'm going to try to avoid that, the best I can.

    I'm not too keen on paying a MASSIVE tax bill this year for rolling my very large 401(k) over to a Roth IRA. I have enough cash on hand to cover it, but a LOT of people in the US don't. Now that I think about, I might compromise and at some point convert some of the rolled 401(k) from a traditional to Roth IRA. Doing it all at once is a bit nutty to me.
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    HaveNoCents Conservative Tree Hugger

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    It actually matters quite a bit.
    1. The traditional IRA forces you to take distributions at 70.5 and start paying those taxes with every withdrawal whereas the ROTH doesn't because the taxes have already been paid.

    2. Taxes are also paid on your gains of those pretax dollars so in essence you pay taxes on the entire amount. Let's say you contributed 200,000 to your IRA or 401k, and your company matched 100,000 dollars of that. Then let's say at retirement your gains on that account were 250,000 dollars. You are going to pay taxes on every dollar of the 550,000 you take out.

    You are not taxed anything on your earnings with a roth. That is pretty darn significant, especially if you have a long time to go until retirement.

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