Ira Rollover Rules

Frequently Asked Questions

1. QUESTION:
   When do the 15% capital gains rate, marginal rate reductions, and the IRA to employer rollover rules expire?
   1. The marginal rates for the various tax brackets were lowered temporarily lowered several years ago, for example, the 28% bracket became the 25% rate. When does this expire and the rates return to normal?
   2. At one time, long term capital gains were taxed at a 20% rate. This was temporarily lowered to 15%. When does this expire and the rate return to 20%?
   3. At one time, you could roll over money from an employer plan (401k, etc.) to an IRA, but not from an IRA to an employer plan. Now, you can. Is this change permanent? If not, when does it expire?

   • ANSWER:
     1. Originally 2005.Now 2010.
     2. Originally 2008, now 2010.
     3. I don’t know.

     All dates are moving targets. The government actually likes to wait until the last minute to “extend” or “patch” legislation as they can use old income projections to balance the budget. When they lower taxes, they are supposed to a) reduce spending or b) increase taxes on someone else to balance the budget. By waiting until it’s politically expedient to do so, they can skirt the paygo rules.

2. QUESTION:
   Can your repay a withdrawal from a rollover IRA to avoid penalties?
   I need to take some cash from my rollover IRA and was wonder what the rules are regarding repayment. If I take out 00 but the put 00 back in say the next 12 months, can I avoid penalties or at least avoid the income tax?
   The distribution would be to cover a shortfall caused by my extended maternity leave (which was last summer) and recurring illness. The illness qualifies as a disability according to SSA but I am not willing to give up and stay home yet, so I don’t think I could take a disability distribution.

   • ANSWER:
     You can withdraw funds from your IRA for up to 60 days tax-free. It’s really important to remember that you have to repay the funds within 60 days to avoid paying income tax and the 10-percent early-withdrawal penalty.

     If you have more than one IRA, you can only make a withdrawal once within a one-year period from each IRA.

     There are exceptions, however, if you’re withdrawing for a first home purchase, certain medical expenses, college expenses, etc. These are very limited exceptions, so I’d need to know more info before giving an accurate answer on these exceptions.

3. QUESTION:
   IRA 60 day rollover rule – regular IRA?
   I borrowed from my IRA while waiting for a refinance to remodel our home (not our first house). I redeposited the early distribution on day 62 rather than day 60. Day 60 fell on a Saturday and the markets aren’t open. (It was from my mutual fund.) Am I still subject to the penalty and taxes (I’m 18 months short of 59 1/2)? Does the financial institution report the distribution?
   I read somewhere that if you have high medical expenses you can get a waiver. We pay more than 7 1/2% of our adjusted gross in medical expenses and even more this year as we are caring for a very ill mother in law. Would that help?
   Does it matter that I have proof the funds arrived on day 60?

   • ANSWER:
     Yes, penalty. This is a weird provision that doesn’t allow the following monday.

     see:

     http://www.virtualex.com/IRARollovers.html

     2. Unlike most tax-deadlines, there is no extension granted if the rollover period ends on a weekend or holiday. So, for example, if the 60-day period ends on a Sunday, the rollover deadline is not extended to the following Monday.

4. QUESTION:
   401k rollover to Roth IRA for married couple both age 60, Does it make financial sense?
   With the new rule in effect as of March 2008 allowing a direct 401k rollover to Roth IRA, could you shed some light on this scenario: A couple, both over 60 files jointly and will be earning less income when retired. Currently both are working and earn 100,000. When retired their income will be 46,000. They have 300,000 combined in their 401k and would like to know if it makes financial sense to rollover to a Roth Ira. Thank you for your help.

   • ANSWER:
     The short answer is – it depends on the tax rate. Let’s take 3 scenarios: Tax rates stay the same, your taxes are lower in retirement and finally your taxes are higher in retirement.

     Assumptions:
     1) You pay for the conversion out-of-pocket (as opposed to funding it with monies in the 401(k)).
     2) If you do not convert, you invest what you would have paid in conversion costs in a taxable account.

     Currently, your marginal tax rate is 28% and in retirement it will be 25%. Paying 28% now, when you can pay 25% later makes a ROTH less attractive. If the government decides to raise taxes, when you retire, a ROTH makes more sense.

     Now, there are other subtle differences between the types of accounts, like required minimum distribtions, that effect estate planning. This example does not consider this.

     You can make a case either way if the government will raise or lower taxes in the future. Since we do not know with certainty, I suggest another option. Rollover 1/2 of your account. Keep some in a pre-tax account (401k) and some in a post tax account (ROTH).

     This is a different kind of diversification – tax diversification. See the source that I listed from vanguard.

5. QUESTION:
   60 Day IRA Rollover?
   I want to take distribution from my IRA Rollover account with the intention of redepositing the funds back in the same rollover account within 60 days. WIll this violate any IRS rules because my intention are not to rollover to another plan?

   • ANSWER:
     See IRS Publication 590. Nothing prohibits changing your mind and redepositing a rollover back into the same account it came from. Just don’t be late. 2 things to be aware of:

     There is manditory 20% withholding from an eligible rollover if distribution is to you. When you put the money back in, you need to add that missing 20% back in from another source, or that withholding would be taxed/penalized. If you do everything on time, you could adjust your W-4 or 1040-ES to recover the withholding sooner that waiting until filing next year.

     If you take a rollover from an account, you cannot take another rollover from that account for a year. And similarly if you put a rollover into an account, you cannot put another rollover into that account for a year. However, a direct trustee-to-trustee transfer to another qualified account is not subject to withholding or rollover frequency limits, if you later want to move any of it to a different trustee directly.

6. QUESTION:
   Any difference b/w ROLLOVER vs. TRADITIONAL IRA?
   I’m doing a direct transfer of all my funds/stocks/etc to one brokerage and they’re telling me I can combing my Traditional and Rollover IRA to make my account view much simpler, which I have no problem with.

   I just want to make sure this is correct, as I don’t want to be surprised with any distribution/RMD/etc rules that may differentiate ROLLOVERS from TRADITIONAL IRA. I already know about Roths, SEP’s and conversions – just need clarification on the 2 types mentioned above. Thanks.

   • ANSWER:

7. QUESTION:
   Can I rollover multiple 401(k) plans into the same rollover IRA?
   I have two 401(k) plans with different employers and wanted to roll them over into a rollover IRA. Is it possible to open just one rollover IRA account and rollover both 401(k) plans into this account? I believe there is a 60 day rule of some sort with regards to rollovers, can someone explain that to me fully and how it would apply if I did multiple 401(k) rollovers?

   I also wanted to convert that rollover IRA into a Roth IRA but would it count towards my Roth IRA contributions for the year?

   • ANSWER:
     What you want to do is not a rollover but a direct transfer from your 401(k) accounts to an IRA trustee. I recommend Vanguard; they have low-cost funds and helpful information. Go to Vanguard (or wherever) and open an IRA account. It must be a traditional IRA, not a Roth. Then contact your former employers, request a distribution form, fill it out, send it back. Your 401(k) account will be transferred directly to the IRA. You won’t get a check. You won’t have to worry about the 60-day rollover window.

     The transfer must be to a traditional IRA. Once that IRA is funded, you can convert all or part of it to a Roth. Remember, you have to pay taxes on the amount you transfer. A conversion doesn’t affect contributions. But keep in mind the income limits that apply to a Roth (if you make too much money you don’t qualify).

8. QUESTION:
   401K rollover to Rollover IRA & ROTH IRA after tax dollars?
   I have a 401K from a previous employer which contains both Pre tax dollars and After tax dollars. I would like to rollover this 401K to my Rollover IRA (pre tax dollars) and my Roth IRA (after tax dollars). I believe the rules beginning 1/1/2008 allow this rollover to take place as a normal rollover, but I’m getting conflicting information from my source & target broker. Can anyone add any insight or clarify my understanding?
   THANKS
   Thanks Elizabeth… by normal rollover I guess I meant Direct Rollover.

   In your example I would end up with 4 accounts (2 pre tax & 2 “after tax”/Roth account)? couldn’t I then “rollover” 2 of the accounts (1 pre, 1 roth) into the other accounts (1 pre, 1 roth)?
   Sorry, I just spent time with my source and target financial institutions and I’m amazed but I’ve gotten various responses when trying to get this accomplished. I BELIEVE it can be done, but would like some “official” IRA document I can send to these 2 brokers.
   THANKS Again

   • ANSWER:
     what is that old saying ” you can’t get there from here” you can do what you want but it will take two movements to get it done == transfer the accounts into new accounts with the receiver and once he receives them than he can combine them!!!

9. QUESTION:
   Borrowing from a roth ira that was converted from a rollover ira?
   I’ll try to keep this as short and simple as I can.

   My husband contributed to a 401k plan at a previous job. He got partial match on contributions. When he left the company, they put it into a rollover ira. When we got married, I took the money from the rollover ira and converted it to a roth. We have not paid taxes on it yet (but will as of April). We are now looking at buying our first home. The conversion was only about a year ago or so, so we are outside of the 5 year rule.

   My questions are these:
   - We are allowed to take contributions out at any point tax free. Does this mean that the money he put in originally while at his previous company is tax free withdrawal, or is it the amount we converted? Is the 5 year rule applied to this?
   - If we take money out towards the down payment on our new home, are we a) paying taxes on the money we take out, and/or b) paying a 10% penalty [since it has not been 5 years]?
   - I’ve read that you can take the money out as long as it is replaced within 60 days. I’ve also read that you can borrow against it as long as the money is replaced by the time taxes come around. What are the rules on this? Do either of these even apply to a roth, or only to traditional?
   - If we take money out at this point, and do not pay all of it back within the 60 days, do we pay taxes + penalty on all remaining outstanding balance? Is our “earned” portion put back in first, or the original contributions? If we have paid back at least the amount of the “earned” portion by the 60 days, how will that effect our taxes and/or will it incur a penalty?

   Thanks.

   Add: I know it’s bad to borrow against an ira because of the long term effect it can have on how much you have at retirement. We will be repaying any money taken out within 4 months. We are looking into this mostly because we don’t want to miss out on the tax credit that is available until the end of April/June.
   When I said “borrow”, I meant “withdrawal”. I only meant that it would be paid back when I said borrow. Sorry for the confusion!

   • ANSWER:

10. QUESTION:
    Can I transfer my Rollover IRA account to a different broker?
    Recently, I had to transfer my 401K account to a Rollover IRA account at my wife’s employer – an investment bank (IB). According to the IB rules my wife or any immediate family member cannot have any trading or IRA accounts with any other IB or brokerage. Unfortunately, the IB charges extremely high commission on stock transactions. So, I am looking for a way to transfer my money out of my wife’s IB and into a brokerage like Ameritrade. Does anyone know if there is a legal way to do that without getting in trouble with the employer?

    • ANSWER:
      Yes, employees of securities firms generally have to have all accounts under their control (yours is assumed to be) at their own firm. Some firms allow outside accounts with duplicate statements going to them, but they don’t have to. The reason for all this is to scrutinize all activity for inappropriate insider trading and the like.

11. QUESTION:
    Can I use an early Roth withdrawal to pay the taxes on the rollover from an IRA into that ROTH?
    I will be 70 and a half in 2012, and I rolled over a portion of my IRA into a ROTH mid 2010 to benifit from the 2-year rule that allows me to report the rollover as income split between 2011 and 2011. Now I want to use any of my RMDs from my IRA to pay toward the resulting taxes. THEN, considering the early withdrawal penalty of 10% on the ROTH is less than the Taxes on an IRA, I plan to pay the remaining taxes with withdrawals from the ROTH. Then after 2012, I plan to continue a systematic IRA rollover to that ROTH that when combined with any IRA RMDs keeps my yearly taxable income below that 0,000 level, and paying the taxes this way. Eventually the 10% penalty goes away.

    • ANSWER:
      I really don’t get the aim of this exercise.

      You said “considering the early withdrawal penalty of 10% on the ROTH is less than the taxes on an IRA”

      But the money you put into the Roth this year is getting taxed in 2011 and 2012, and seeing how you aren’t looking at a long-term growth window (like a 22 year old right out of college) you lose the main benefit – long term tax free growth. On top of that, you pulled money out when you didn’t need to during a down market, meaning you won’t benefit as much from the hopeful rebound in the coming years.

      Worse yet, you’ve now increased your taxable income over the next 2 years, which might put you in a higher tax bracket (unless you would be at the highest rate anyway, which would be even worse, because you accelerated income in a higher bracket when you could wait it out, take it as needed, and keep taxes low as possible).

      I would probably go talk to some sort of financial adviser and get this whole thing sorted out. You still have time to have the Roth conversion reversed (“recharacterized”) so you won’t get dinged on taxes

12. QUESTION:
    Are there any time constraints on doing a direct rollover from a 401(k) to an IRA, after a job loss?
    I want to rollover funds from my old 401(k) plan to a traditional IRA. Does it matter when I do this, as far as tax implications and things of that nature? For example, can I do it 6 months after I lost my job, just the same as if I had done it 6 days after I lost it?

    I had previously asked a question about the IRS’s “60 day rule”. If I understand correctly, that rule is only for an “indirect rollover” in which I would take a distribution from the 401(k) directly to myself and put it into an IRA later. But I realize I may not be understanding that correctly, and also I’m not sure if there are any other rules I’m unaware of.

    Thanks!

    • ANSWER:
      Your understanding is 100% correct. As long as you rollover from one institution DIRECTLY into another, there is no time constraint or tax implication….unless you rollover into a Roth IRA.

13. QUESTION:
    Does the 60 day rule apply to Roth IRA contributions?
    Roth IRA contributions can be withdrawn at any time with no penalties. I am aware of the 60 day (and only once per 12 months) rule, but does this rule apply only to earnings or to all funds that are withdrawn (contributions and earnings)? Can I rollover contributions past the 60 days and/or more than once every 12 months?

    • ANSWER:
      The 60 day limit applies to ALL rollovers, whether to a Roth or a traditional IRA.

14. QUESTION:
    Can you withdraw IRA funds early to pay student loan debt off?
    If I wanted to take money out of an IRA that was a rollover from a previous 401k to pay off student debt of my wife of 11 years in the amount of K, can I consider this an exception to the 10% additional tax rule? Thanks

    • ANSWER:

15. QUESTION:
    Can I take out a traditional IRA now and convert to an existing Roth IRA later?
    This is my scenario. I currently have a ROTH IRA. For this and next year I would like to take out a traditional IRA, and in a few years (2010) convert this to my current ROTH IRA. I had read somewhere I thought you can only do a rollover like this one time. Does anyone know the rules on this? Thanks!
    Thanks for the answers. I know it’s kind of tricky. I would rather get the tax break now and pay the taxes in a couple of years because of my financial situation. But i would want to do it all at once. For example, rollover the total of all my traditional IRAS into my existing ROTH. Don’t mind paying the taxes at that time, but dont want it counted as a withdrawl and get penalized, etc. I eventually just want it all in one account. I’m just scared there is a catch somewhere ( or will be in 2 or 3 years). Several years ago, they let you do that rollover thing all at once, and I did do it at that time.
    To the last response from TBONE. You mentioned in 2010 you can rollover a traditional ira into a roth ira…this is the whole crux of my concern…I know I can roll it into “an IRA” but can I roll it into “an existing IRA” that I had before i started opening up the traditional iras?
    Thanks!

    • ANSWER:
      Yes you can rollover a Traditional IRA into an existing Roth IRA. If you have multiple Traditional IRAs, you can roll them all over into your existing Roth IRA.

      Right now, the rule says that if you rollover your 401k into a Traditional IRA, you must wait one year to roll it over again into a Roth IRA. In 2010, you can roll over your assets into a Traditional or a Roth IRA.

16. QUESTION:
    If I convert my rollover & nondeductable IRAs to Roth, can I then comingle those with my existing Roth IRAs?
    In my retirement account I have a Rollover IRA from a former employer, a Roth IRA, and also a traditional (nondeducted) IRA, all are in separate accounts — I understand that tax rules don’t allow comingling of funds with different rules (like Roth vs. Traditional.) If I convert my Rollover and traditional IRAs to Roth, then all the different accounts would be under the same rules. Will I then be able to combine/comingle those acconts, so all the funds are in one big account?

    • ANSWER:
      Yes. Once all your IRAs are converted to Roths, you can transfer them to another Roth of your choosing.

17. QUESTION:
    Early IRA withdrawals for a house down payment?
    My wife and I are getting ready to put a down payment on our first house, and I know that I can take a K withdrawal from a traditional IRA penalty-free. What I don’t know is, can my wife ALSO do this (we file jointly). Also, I know that there is a similar (but slightly different ) rule regarding Roth IRA’s. Does anybody know if I can do all three (K from my rollover IRA, K from my wife’s rollover, and K from my Roth)?

    I tried looking at the instructions for IRS form 5329, and found them utterly baffling. HELP!!!

    • ANSWER:
      Your “taxpayer unit” (you AND your wife) can only take a maximum of ,000 for the “first-time homebuyers exemption” from all of your Traditional IRA’s without being subject to the penalties.

      You can also withdraw any amount of your Roth IRA that YOU HAVE CONTRIBUTED. For example, if you’ve got a Roth IRA that is worth ,000, and you’ve contributed ,500 and it has grown by ,500 since you started it, you can withdraw the ,500 that YOU contributed to it, any time, for any reason, without penalty. (This is one of the advantages of a Roth IRA vs. a traditional IRA).

18. QUESTION:
    retire at 59.5 spouse will be 57.10 rollover 401 & defined benefit does pre 59.5 rules still govern?
    Do we keep seperate IRAs or can we combine

    • ANSWER:
      Yes………can’t combine…..IRA = individual retirement account

19. QUESTION:
    ROTH IRA QUESTIONS – Rollovers/conversions/recharacterizations…?
    FACTS:
    1) I had a SIMPLE IRA from 2004-2008 at a former job. Last contribution was in 2004.
    2) Towards the end of 2008, I “moved” (rolled over? converted?) all the funds in my SIMPLE IRA to a ROTH IRA with Nationwide (yeah, they don’t just do car insurance!)
    3) I paid taxes on the amount that was “moved” but no penalties (since I didn’t take the money out of course, but just went from one account to another)
    4) Surprisingly, I have not yet contributed to my new ROTH IRA yet
    5) I am now finding that I don’t like the company and options available in my current ROTH and want to “move” funds again….but not back to a SIMPLE or Traditional IRA, just to a different company but still as a ROTH.

    QUESTIONS:
    1) When I “moved” from SIMPLE to ROTH, that was a conversion, right? If so, then what is a rollover?
    2) I never even heard of a SIMPLE IRA until recently! (thought I had had a Traditional IRA the whole time at my last job). Other than the rule that you can’t move funds less than 2 years after your last contribution, is there really any other significant differences between a SIMPLE IRA and a Traditional IRA. If not, then when I am reading about the characteristics and pros/cons of a Traditional IRA (which there is more info online for Traditional IRAs than SIMPLEs) I can pretty much use that same info for a SIMPLE?
    3) Can you have more than one ROTH at a time, so long as you don’t go over the contribution limit of 00 for the year? If so, then instead of moving my funds again, maybe I will just open a second ROTH?
    4) Regardless of whether I could have two ROTHs at the same time, or if I closed my current one and opened up a new one, in either scenario, I would want to “move” my funds from the old one to the new one. If I were to “move” funds from my ROTH with company A to my new ROTH with company B, would that be a rollover or a conversion? I’m thinking it definitely would not be a “recharacterization”, because my understanding is that it would only be called that if you were to transfer funds back to a different TYPE of IRA (like back to a SIMPLE or Traditional from my ROTH, which I wouldn’t be doing) or that you are trying to say a certain conversion should be treated differently
    5) As stated in the facts above, there are currently NO contributions in my current ROTH, only the amount of the previously “moved” funds. And based on how the market went down over the last several months, there are no positive earnings (my balance is definitely lower than when I moved the funds). So if I moved funds to new ROTH, I am thinking there would be no taxes (since I was taxed when they were first moved in and the only other thing you get taxed on are earnings but I’ve had no earnings). And also no penalties (because I am not really withdrawing funds but simply moving them again to another account)?
    6) If it is true that I can in fact move my funds to a new ROTH, since both of these ROTH transactions will have happened in the same tax year (2008), can I assume that for purposes of the “5-year rule” (in determining if future withdrawals of earnings will be taxed/penalized), that my 5 years will still start from the same time (January 1, 2008)?

    I know I’ve asked A LOT here, but a nice big whopping 10 points to whoever can try to address as many as you can. And I have numbered things so we can all keep it straight!
    My current company holding my ROTH said that I bought “B shares” for my mutual funds, which are the kind that charge certain back end fees if you sell earlier than 5 years, it goes down like every year or something. So it looks like I wont have any tax or penalty issues, but broker fees is the 3rd thing to factor in and looks like I would have to pay that so maybe I should just keep things how they are?

    • ANSWER:
      1) The easiest way to distinguish btw rollover and conversion is that rollover refers to an account transfer where the account type is the same (roth to roth, or 401k to regular ira) and so there’s no tax implication. The conversion, as you said, involved a tax payment because you changed from a pretax account (401k) to a post-tax retirement account (Roth).

      2) For your purposes, it’s fair to say that your SIMPLE account is the same as a Traditional IRA account. The major differences are related to the decision factors of your employer to set up the account and determine how much can be invested, etc. But since you already have this account set up and funded, from your perspective, not much difference to you.

      3) Yes, you can have more than one Roth Account at one time. You can have as many as you want, as long as you don’t fund greater than ,000 into your various Roth accounts for any given TAX year.

      4) Roth to Roth is rollover. Trad IRA to Trad IRA is a rollover. Roth to Trad IRA or vice versa is a conversion. A recharacterization is where you go back to an investment you did in your current tax year, and change the type of retirement account so your understanding is correct.

      5) Right you are. Roth to roth rollover means no tax consequences or penalties.

      6) The 5 year rule applies to time from when you made the original contribution or conversion. Let’s say you contributed the money to either type of ira in 2005. Regardless of how many rollovers you did with this money, you can still take out the money after 5 years (and also as long as you are over 59.5 years) without penalty.

      If you did a conversion, the same 5 year rule applies. If you did the conversion from Trad IRA to a Roth IRA in 2008, you have to way 5 years from the 2008 date. In that time, you can roll over the Roth IRA to different types of Roth IRA accounts, but it’s the date of the original conversion to this type of account that matters.

20. QUESTION:
    Can I contribute to a Roth IRA if I am self-employed and have a NOL?
    I am self-employed and had a net operating loss and carry back on my taxes last year. This year, I expect to be in the same situation – I have brought in some income but my expenses out weight my income.

    Since I am in my 30s and have next to no retirement funds, I have done some research and really like the Roth IRA. The contribution rules state that I must have “earned income” in order to contribute and in some places I read they also talk about my adjusted gross income (AGI). I will have no income to report on 1040 line 7 and line 12 Schedule C I expect to be a negative number (Net Loss).

    Does this mean I cannot contribute to a Roth IRA? I have small hopes that the number I really should be looking at is line 1 of schedule C as my earned income instead of line 31 of Schedule C.

    If I cannot contribute to a Roth IRA, what is the next best option to save for my retirement when I have a net loss?

    More information that may or may not help: I am single but being supported by a same-sex partner while I get my business going. Due to same-sex discrimination I cannot use my partner’s income to contribute like DMOA spouses can. I have an old 401k (only 10k) under my old employer that I’ve been told I need to rollover at some point. I’ve also looked into a SEP-IRA but it requires net profit and even then I can only contribute 18.6% of the net profit (I am many years from being able to put much money into one of these!). Due to my medical issues, our plan is for my personal business to just be our supplemental income so I will only work part-time in the long term. This might mean I will probably be limited for retirement contributions even if I reach my current business goals.

    • ANSWER:
      It’s true. You need “earned income” (wages, NET self-employment income, etc.), or surprisingly, alimony, to fund a retirement plan like a Roth IRA, SEP-IRA, or Traditional IRA. Your regular and Roth IRA contribution limits are 100% of earned income or ,000 (,000 age 50 and older), whichever is less. SEP-IRA limits are 20% of (net self employment income less 1/2 of self- employment tax), or ,000, whichever is less. Other retirement-planning investment options could include:

      1. Annuity (Variable or Fixed). Much like a non-deductible traditional IRA, earnings, if any, grow tax-deferred until withdrawn, and a 10% IRS early-withdrawal penalty may apply to earnings withdrawn prior to age 59 1/2. No contribution limits except those that may be imposed by the insurance company.

      2. Mutual Funds and/or Brokerage Account. If you’d like to avoid probate at your death, you can title these as Transfer on Death accounts with one or multiple beneficiaries.

      Find a strategy you can embrace and invest systematically, monthly, for example, regardless of all the “noise” you’re bound to hear in the media.

      Hope that helps.

      On behalf of all of your responders, who take the time and effort to help questioners in this free Yahoo! community, THANK YOU in advance for taking the time to choose your “Best” Answer. We really appreciate it.

      DISCLAIMER: While the information in this response was obtained from sources believed to be reliable, its accuracy and completeness cannot be guaranteed. The opinion voiced in this answer is for general information only and it shall not be construed as tax, legal, or investment advice for any individual. Questioners are urged to consult with their professional advisers before making any decisions regarding their finances

      Bradley Mann, EA, CFP®, BCE
      Enrolled Agent | Admitted to Practice before the IRS
      Certified Financial Planner™ Practitioner

21. QUESTION:
    how to borrow from IRA?
    Will I break the rule of borrowing IRA only once/ year if I borrow from both ROTH & Coventional IRA accts at the same time?

    ·Is there a maximum percentage to borrow ?
    ·Can I put the money back to the same existing acct ?
    ·Is it safer to open a new IRA acct to put the borrow money back in? ( rollover), but my existing IRA still have balance left. It’s not liquidated.

    If I return the borrow money back within 60 days, then questions below hold true?
    ·No penalty, no interest & no tax will be imposed?
    ·No restriction on how I can use this money on ?
    ·No need to report the withdrawal to IRS for the following year tax return ?
    ·My IRA broker will not report this withdrawal to IRS if I returned all the money within 60 days?

    Thanks in advance of your responses.

    • ANSWER:

22. QUESTION:
    Should I convert my traditional IRA to a ROTH before end of 2010?
    I recently changed jobs and rolled my 401K over to a traditional IRA. With the 2010 rule that allows individuals to rollover a traditional to a Roth and split taxes over 2011 and 2012, I want to take advantage if it makes sense. I have about K in the traditional IRA. This may bump me into a higher tax bracket, but I’m only 33 years old right now so the benefits of being able to grow the money tax-free will possibly outweigh any tax hit I take now. Any advice?

    Also, when it says that you can split taxes over 2011 and 2012, does that mean that I will claim 50% of the converted amount on my upcoming taxes that I file in 2011 for 2010 income? Or does it mean that I won’t have to add the converted amount as income until I do my taxes for 2011 income? Thanks for any input.
    Also, is it possible to rollover a portion of the IRA in 2011? Meaning can I just go ahead and rollover half of it next year in 2011 and then half of it in 2012? There are obviously lots of things that will factor in from a tax standpoint that will impact my decision (mortgage interest payments, etc). I plan to talk to a tax accountant/adviser, but I just wanted some quick feedback on the IRA rules since it’s 12/30. Thanks!

    • ANSWER:
      The question is do you want to pay taxes on this retirement now or when you start taking the money out ? Traditional IRA you pay taxes when you take out in the future. Ross is you pay now so at retirement there is no tax. Ross also has other benefits. Talk to a tax person for the right info.

23. QUESTION:
    Should I roll over my ESOP shares from my previous employer to a Roth IRA or my new employer’s 401k plan?
    I have ESOP shares that, per the rules of the plan and maybe the law, must be distributed this year. I can do a direct rollover to a Roth IRA or a qualified employer’s plan. In this case, my new employer provides a 401k. So I have 2 options to avoid the 20% witholding penalty and also 10% to 15% early withdrawl tax penalty. I am thinking to go to the 401k so I can manage only one account, and the rate of return seems to be better right now than Roth IRA’s. Then again, having the Roth IRA will diversify my portfolio, and, will it accrue have a higher rate of return? Note that I am almost able to afford the max contribution of ,500; will probably be able to max out next year or so if I get a raise, and I am rolling over my balance from the previous employer’s 401k.

    What do you think?

    • ANSWER:

24. QUESTION:
    Roth IRA Conversion in 2010 – Federal and State Tax?
    Let’s say I have ,000 in Traditional IRA. In 2010, if I rollover entire amount to Roth IRA, am I taxed as ordinary income of ,000 each in 2011 and 2012? What about in 2010?

    Does the same rule apply to state taxes? I’m in California.

    • ANSWER:

25. QUESTION:
    Retirement Distribution Confusion for 2010 Federal Tax?
    1) Let’s say that you withdrew 0 from your 401K and rolled it over to a Rollover IRA and then converted of 0 into Roth IRA. It appears like in the eyes of IRS, they consider both transactions as distributions (401K -> Rollover IRA, and Rollover IRA -> Roth IRA). So it turns out under IRS rule, my total distribution is 0 (0 + ) even though only is taxable as was converted from Rollover to Roth IRA. Is this correct?

    2) Another confusion is, you can get Retirement Savings Contribution Credit, but Turbo Tax asks you if you received any distribution from Retirement Plans in 2010. I think, I have to answer with 0 even though my before tax money is and my after tax money (which went into Roth IRA) is … So the actual amount is only 0, but I think I have to say my total distribution is 0 even though it doesn’t make sense. Am I correct?

    Please help. This tax is a pain in where you know what.
    Yes, the rollover took place WITHIN 60 DAYS so it would mean that amount is NOT distribution?

    • ANSWER:
      it is only a pain since you made it so
      first of all if you rolled over either a 401(K) or and IRA into another within 60 days it is not a distribution

      then if you actually took a distribution of 0 that would be taxable
      if you converted to the Roth, you would pay income tax on the , and early withdrawal penalty as well

26. QUESTION:
    Confused about rollovers, conversions, and recharacterizations…?
    FACTS:
    1) I had a SIMPLE IRA from 2004-2008 at a former job. Last contribution was in 2004.
    2) I just recently “moved” (rolled over? converted?) all the funds in my SIMPLE IRA to a ROTH IRA with Nationwide (yeah, they don’t just do car insurance!)
    3) I paid taxes on the amount that was “moved” but no penalties
    4) I have only had the new ROTH IRA for about 4 months but have not contributed to it AT ALL
    5) I am now finding that I don’t like the company and options available in my current ROTH and want to “move” funds again. But not back to a SIMPLE or Traditional IRA, just to a different company but still as a ROTH.

    QUESTIONS:
    1) When I “moved” from SIMPLE to ROTH, that was a conversion, right? If so, then what is a rollover?
    2) I never even heard of a SIMPLE IRA until last week! (thought I had had a Traditional IRA the whole time at my last job). Other than the rule that you can’t move funds less than 2 years after your last contribution, is there really any other significant differences between a SIMPLE IRA and a Traditional IRA or when I am reading about the characteristics and pros/cons of a Traditional IRA (which is more prevalent online) I can pretty much use that same info for a SIMPLE?
    3) Can you have more than one ROTH at a time, so long as you don’t go over the contribution limit? If so, then instead of moving my funds again, maybe I will just open a second ROTH?
    4) Even if I could have two ROTHs (which I’m thinking you cant), then if I were to “move” funds again from a ROTH with company A to a ROTH with company B, would that be a rollover or a conversion? My understanding of a recharacterization is that would only be if you go back to a different TYPE of IRA, like back to a SIMPLE or Traditional from my ROTH, which I wouldn’t be doing.
    5) As stated in the facts above, there are currently NO contributions in my current ROTH, only the amount of the previously “moved” funds. And based on how the market went down these past months, there are no positive earnings (my balance is definitely lower than when I moved the funds). So if I moved funds to new ROTH, I am thinking there would be no taxes (since I was taxed when they were first moved in) and no penalties (because I am not really withdrawing funds but simply moving them again to another account)?
    6) If it is true that I can in fact move my funds to a new ROTH, since both of these ROTH transactions will have happened in the same tax year (2008), can I assume that for purposes of the “5-year rule” (in determining if future withdrawals of earnings will be taxed/penalized), that my 5 years will still start from the same time (January 1, 2008)?

    I know I’ve asked A LOT here, but a nice big whopping 10 points to whoever can try to address everything.

    • ANSWER:
      We generally use rollover when referring to investments like Certificates of Deposit (CD’s). When the 3 month matures, you roll it over into another 3 month CD. Some are done automatically so you don’t have to fill out another paper.
      Conversions are when you have an option to buy shares of stock. One day you decide to convert your options into shares. You buy the shares. You have converted them or done a conversion.
      Some preferred shares are convertible into regular shares under certain conditions . When those conditions arrive, they are converted.
      We don’t use those terms for Roth’s or IRA’s. So i worry that you are going to make a bad decision just because you said the wrong term.
      You just want to take your Roth from your current employer to you new employer. Then you can change the plan to any new plan offered by the new employer. Anyone knows exactly what you want to do..

27. QUESTION:
    Employer removing too much from 401k? Who owns the appreciation on the vesting portion that is forfeited?
    The company I recently left has a four year vesting schedule for their matching. Since I left in year three, the company is taking back 25% of their contributions (and a bit more). I backed into their calculations and figured out that they did not calculate the 25% based on what they contributed but based on what they contributed plus that appreciation. To illustrate, here are some example numbers:
    Company Contributions:
    ,000        Year 1 company matching contribution
    ,000        Year 2 company matching contribution

    ,000        total company matching contribution

    One would figure that with a 75% vesting, the company would deduct 0 (25% of ,000) that they contributed and I would rollover ,500 to my IRA.

    However, the company deducted 0 and only contributed ,400.

    I figured out the issue lies in the fact that the value of the original contribution rose from ,000 to ,400 via mutual fund stock appreciations. The company multiplied 25% times the ,400 to reach the 0. This does not seem right to me. The original promise was a defined contribution of ,500 given the vesting. However the company, only contributed ,400.

    Anyway, I guess this begs the question – Who owns the appreciation on the matching contribution that is not vested?

    It appears to me that company owes the amount promised at the time of contribution (,500) not a lesser amount because of appreciation (,400). Is ,500 not the definition of “defined contribution.”

    Anyway, has anyone run into this before?
    Am I thinking about this the wrong way?
    Is there an IRS ruling?

    Thanks

    PS I know this is not a large amount but I do find it disturbing that such trickery is played. It seems that investment prowess (or luck) is my returns, not a way to lower their original promise of contribution. I doubt if I lost money that I would have to pay less back.
    Actually I worked three years plus a few months, so 75% is the correct vesting percentage.

    • ANSWER:
      They aren’t going to do anything illegal – 401k plans are audited by the government

      maybe there is some kind of penalty deduction also

      you are arguing about 0???? give it up already

28. QUESTION:
    Can your repay a withdrawal from a rollover IRA to avoid penalties?
    I need to take some cash from my rollover IRA and was wonder what the rules are regarding repayment. If I take out 00 but the put 00 back in say the next 12 months, can I avoid penalties or at least avoid the income tax?

    • ANSWER:
      You didn’t state the reason for the withdrawal, so here’s some of your options:

      Eight Ways to Avoid the 10% Early Withdrawal Fee on Your IRA

      Many IRA owners are aware they can be hit hard with penalty fees if they withdraw money early. Fortunately, there are ways to avoid these fees if an emergency or other qualifying situation arises. Before we begin, let me say that even with these allowances, you should make every effort to avoid taking money out of your retirement accounts early, especially if you are young. By withdrawing money, you are losing decades of tax-free compounding which can cost you hundreds of thousands of dollars by the time you retire.

      1. Permanent disability of IRA owner
      Money can be withdrawn without penalty in the event the IRA holder becomes permanently disabled.

      2. Death of IRA owner
      It’s small consolation, but if you kick-the-bucket before you’re 59 1/2 years old, your estate won’t be hit with the 10% early withdrawal fee.

      3. IraWithdrawals are used to pay non-reimbursed medical expenses
      In the event of serious illness or injury that requires prolonged or expensive medical treatment, Uncle Sam will waive the early withdrawal fee on the condition that the expenses are in excess of 7.5% of your adjusted gross income.

      4. Withdrawals used to help pay for first-time home purchase
      Despite a lifetime limit of ,000, this exemption can make it much easier for an IRA owner to buy a house.

      5. Higher education costs
      College can be expensive. Thankfully, certain higher education costs for you, your spouse, children or grandchildren can be withdrawn penalty-free. You may still owe federal income tax, however. For more information, read the Internal Revenue Service article, Notice 97-60 Using IRA Withdrawals To Pay Higher Education Expenses.

      6. Money is used to pay back taxes to the IRS after a levy has been placed against the IRA
      This is not the kind of exemption for which you want to qualify, but it may save you money if you find yourself in an uncomfortable position with the IRS.

      7. Withdrawals used to pay medical insurance premiums
      Out of a job? The rest of the world may be topsy-turvy, but rest assured, you won’t be penalized for using retirement money to pay your medical insurance as long as you have been on unemployment for longer than twelve weeks.

      8. Made on or after the day the IRA owner turns 59 1/2
      Once you have reached the qualifying age of 59 1/2, you can make penalty-free regular withdrawals upon which to live.

      A Caveat
      There is one catch to these qualifying exemptions; the holder of an IRA is subject to a five year waiting period (measured in tax, not calendar, years). An investor could not, for example, deposit ,000 in their IRA this year and withdrawal it next year penalty-free even if it would otherwise qualify as an exemption.