401k
401k Information

Roth 401k Rules

The Roth 401(k) plans started in 2006 with the Economic Growth and Tax Relie 00004000 f Reconciliation Act of 2001 There are some simlar features in the Roth IRA and the Roth 401(k) plans, but there are also some differences that we need to look at.

The Economic Growth and Tax Relief Reconciliation Act of 2001 started the 401(k) plans. They are often referred to as hybrids, meaning they are a cross between the traditional 401(k) plan and the Roth IRA. A Roth 401(k) is an option under the traditional 401(k) plan. So a plan cannot exist with only a Roth 401(k), plans must offer both pre- and after tax contribution options. An after tax contribution is made by designating a portion of your compensation as a Roth 401(k) contribution. You must know that this designation is irrevocable, you will not be able to reassign a Roth 401(k) contribution to have it later treated as a conventional pre-tax contribution.

Roth 401(k) contributions will not reduce your W-2 income. The amount of the contribution will be included in your income and be reported on your W-2 as taxable wages and compensation. The advantage is that earnings can then build up tax free.

Traditional 401(k)s and Roth 401(k)s have many similarities. Both traditional Roth IRA’s and the Roth 401(k) have the same contribution limits. Fro 2007, up to ,500 can be designated as a Roth 401(k) contribution, or if you are 50 or older you can designate up to ,500 by the end of 2007. The contribution limits are adjusted annually for inflation. You may designate all or part of your contribution to the Roth 401(k). You must decide on how to split these contributions by looking at your tax situation and the advantages of each plan. You should consider the current and the future tax implications of each plan and weigh the current tax cost against the potential tax free income in the future.

Employers are allowed to make contributions , but the actual contributions can only be allocated to the traditional 401(k) accounts. No portion of your employer match may be allocated to the Roth 401(k). Also, funds must be held separately for regular and Roth 401(k) contributions. Investment earnings and charges must be allocated appropriately to each type of account. If you have any plan forfeitures, they can only be allocated to the conventional 401(k); they cannot be allocated to the Roth 401(k).You will have to keep track of each.

You must designate a contribution to the Roth 401(k) before a contribution can be made. Also, under the terms of the plan you must be able to make designations annually.

Allocations to each type of account are non-forfeitable. So if you leave your job, you may roll over your Roth 401(k) to an account with your new employer, or you can roll over to a Roth IRA. A rollover to another Roth 401(k) can be made only via a direct transfer to a new account. The five-year period, discussed more fully below, will carry over to the new Roth 401(k).

If funds should be distributed to you directly, you can be roll over the funds within 60 days to a Roth IRA. They cannot be rolled over to a Roth 401(k) at a new employer because they were distributed directly to you rather than transferred directly to the new Roth 401(k). The five-year period does not carry over from a Roth 401(k) to a Roth IRA; a new five-year period must commence following a rollover to a Roth IRA. Also, once funds have been rolled into a Roth IRA, they cannot be rolled to a Roth 401(k).

Roth 401(k) contributions differ from traditional 401(k) contributions in one obvious way. Roths are made with after-tax dollars, while traditional 401(k) contributions are currently excluded from income. So while Roths will have no immediate impact on your taxes, you will find that traditional 401(k)s will. However, the earnings on Roth 401(k)s can become fully tax free. Both contributions and earnings in traditional 401(k)s remain fully taxable when distributed.

Roth 401(k)s are similar to Roth IRAs because both are funded with after-tax contributions. There isn’t an immediate tax break for putting money into the plan. Roth 401(k)s are also similar to Roth IRAs in the way in which qualified distributions are treated. As with a Roth IRA, funds must be held in a Roth 401(k) for at least five years, then be distributed after age 59-1/2, or on account of disability or death. The first time home buying distribution option for the Roth IRA does not apply to the Roth 401(k).

Roth 401(k)s are different from Roth IRAs in several important ways. These are as follows;

1) Funds from a regular 401(k) cannot be converted to a Roth 401(k), while funds in a traditional IRA can be converted to a Roth IRA. Currently there are income limits on eligibility to convert. Starting in 2010, the income limits are dropped, so you eligible to convert at that time.

2) There is no income limitation on funding a Roth 401(k) as there is for Roth IRAs. In 2007, single taxpayers with modified AGI over 4,000 and joint filers with MAGI over 6,000 are barred from contributing anything to a Roth IRA. Under these circumstances, Roth 401(k)s have the obvious advantage over Roth IRAs.

3) There are required lifetime distributions from Roth 401(k)s; there are no such requirements for Roth IRAs, making Roth IRAs better. Generally, this means that you must start withdrawals from a Roth 401(k) at the age of 70 1/2. If you are still employed at the company maintaining the plan, the plan can allow distributions to commence after retirement if later than age 70-1/2.

Contribution limits are much lower for Roth IRAs than they are for Roth 401(k)s. ,500 is the top contribution for a Roth 401(k), or if 50 or older by the end of the year, the limit is ,500. For Roth IRAs, the contribution limit for 2007 is ,000, or ,000 for those 50 or older by year end. In this respect, Roth 401(k)s are better than Roth IRAs.

5) Early distributions which are distributions before the end of the five-year period, are treated differently. For Roth IRAs, an early distribution is treated first as relating to nontaxable after-tax contributions. If the distribution exceeds these contributions, the excess becomes taxable. Your earnings will be considered withdrawen last. There is no current tax if a distribution does not exceed contributions to a Roth IRA.For Roth 401(k)s, non-qualified distributions are included in gross income to the extent allocable to income on the contract, and excluded from gross income to the extent allocable to investment in the contract. The amount of a distribution allocated to investment in the contract is determined by applying to the distribution the ratio of the investment in the contract to the designated Roth account balance. If you under age 59-1/2 when the distributions are taken, there is a 10% early distribution penalty, unless an exception to the penalty applies.

So when would it be advisable to use a Roth 401(k)? Here are some factors to consider.

1) If you are younger with a long time until retirement, you may wish to opt for future tax-free income by sacrificing current income deferral. If so, you should choose the Roth over the traditional 401(k). There will be many years in which to build up a sizable retirement fund that produces tax-free income.

2) If you are planning to leave retirement funds to charity, you probably will want to opt for the traditional 401(k). This will give you current tax deferral and no future tax cost. For example, an estate can claim a charitable deduction for funds left to charity.

3) If you are currently in a lower tax bracket, you will not save substantial taxes by opting for current income deferral, and may prefer making Roth 401(k) contributions to the extent possible. In this way, future withdrawals will be tax free when you probably will be in a a higher tax bracket.

This article may not be complete and you should consult an expert about your individual tax situation. However, I have attempted to provide enough information to help educate yourself on the basics. I hope you have found this information helpful.

Frequently Asked Questions

  1. QUESTION:
    Roth 401K dispersment after 70.5 yrs of age?
    I will have to take the minimum dispursement required by law this year. Will I be penalized under Employer Roth 401K rules which limit withdraws while still employed?

    • ANSWER:
      The employer is REQUIRED to comply with mandatory withdraw LAWS. The law does NOT permit penalties for MANDATORY withdraws.

  2. QUESTION:
    Should I move my 401k to a ROTH now rules changed in 2008 ?
    31/Switched jobs…..deciding on whether to move my 0k of 401k.
    “Beginning in 2008, individuals are able to roll assets from a Company sponsored retirment account in to a Roth IRA, provided all qualifying conditions are met.” (excerpt from my 401k newsletter?
    Do you have to open a separate ROTH IRA (i already have a Fidelity Roth) for this ?
    I would assume you couldnt mix pre/post tax $$.

    • ANSWER:

  3. 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.

  4. QUESTION:
    Foreign Earned Income and Roth IRAs and Roth 401k?
    Hi. I am an expatriate. I file Form 2555 (Foreign Earned Income) and am able to exclude the maximum from my pay. My pay is above that threshold. I also have dividends, capital gains, and a military pension as my sources of income.

    I’ve searched the IRS.gov website and can’t find the answer to my questions, keep in mind I file Form 2555 with our joint Form 1040:

    1. Am I allowed to contribute to a Roth IRA (yes or no) according to the IRS rules?

    2. Am I allowed to contribute to a Roth 401k (yes or no) (my employer offers it along with a traditional 401k) according to the IRS rules?

    3. Am I allowed to open and contribute to a spousal Roth IRA for my wife (yes or no) according to the IRS rules?

    If you have the answers, please, would you also share the reference (title, chapter, page, and paragraph number(s)) so I can research it and have it for reference?

    Again, please keep in mind I file Form 2555 and a joint Form 1040.

    Thanks.

    • ANSWER:
      I am going to assume that you have over ,000 in nonexcluded wages and that you and your spouse are under 50. Add ,000 for each spouse age 50 or older. I am also assuming that your modified AGI is under 6,000 (which includes the excluded income).

      1. Yes
      2. Maybe
      3. Yes

      Answers to 1 and 3 are specifically addressed in IRS Pub 590. If you do not meet my assumptions, this publication details all other cases as well.

      http://www.irs.gov/pub/irs-pdf/p590.pdf

      To answer 2 you need to contact your HR Department. If you meet the rules for participation established by your employer, you may participate.

  5. QUESTION:
    Which is better Traditional 401k or Roth 401K?
    Considering that opting for the Roth 401 would mean investing less money. For example, traditional 401 i’ll invest 300/ month and roth possibly 230/ month. Which scenarios work better with which plan? Any rule of thumb? If the market is going to sky rocket do you want to invest as much as possible (traditional) or do you want to all the money you’re gonna make to be tax-free? Or perhaps, does anticipated inflation lean to one or the other?

    • ANSWER:
      It is a very close call. By the time you retire you most likely will have your house paid off and will be spending less money. Chances are you will be in a lower tax bracket. Biased on that I would go traditional. Some people do a 50 50 split. I do my 401k traditional and add to my Roth IRA.

  6. QUESTION:
    Is a Roth 401K @ age 24 a good idea?
    I have a regular 401k and a roth. I only allocate a small percentage of money to it but after reading up on it i’m starting thinking it’s more wise to increase my percentage on the regular 401k and stop contributing to the roth. With the 59 1/2 rule and applicable distributions, I don’t believe it’s necessary for me (who may not be with the company by age 59) to continue contributing to it.

    My only issue is i may be able to roll it over to another roth but I think I’d get more for my buck with the regular 401k contribs. Any advice in regards to the roth?

    • ANSWER:
      A Roth IRA is a good idea at ANY age. It is especially good if you think you will be retiring in a higher tax bracket than where you are now. If you save a lot of money for retirement, isn’t that the goal — to have a pile of money you can depend on?
      The Roth grows tax free, and when you take out the earning when you are old, the money is all tax free as well.

      I would keep contributing to both. If anything, if forced to choose, take a closer look at that 401k you have. Does your company match your input? Put in as much as you can to get their full match at least. But beyond that look at what you are investing in — are they really good companies or funds? Many 401ks offer mediocre choices. And many companies have very high fees.
      Look at:

      http://www.vanguard.com/us/insights

      and look closely at the truth about costs. You can see how much that company managing your portfolio is skimming off for itself and how much you are losing in earnings over time.

      I applaud you for being interested in this though. With 40+ years to grow, you can amass quite a fortune to retire on.

  7. QUESTION:
    Roth Conversion rules for 2010?
    If someone made a very large withdrawal from a 401k in 2010 and they did not know about the Roth conversion rules at the time, is there any way to make an addendum to the taxes so they can pay the taxes on the withdrawal in 2011 and 2012? If this individual knew at the time they would have definitely converted the 401k, because they were retiring at the end of the year and their income would have dropped substantially in 2011. The withdrawal was 0k which will make the taxable income in 2010 0k. If the conversion would have been done before the withdrawal the taxable income would be 0k in 2011 and 0k in 2012. The individual is over 59 1/2 so the 5 year aging date would also not be applicable.

    • ANSWER:

  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:
    Roth conversion – good option or not?
    Hi,
    Here is my situation: I’ll be out of US for next 8+ years (may be more) on overseas assignment with family. I have 401K but don’t have Roth IRA.

    Can I convert my 401K to Roth IRA based on 2010 Roth conversion rules and save on early withdrawal penalty?

    I’m thinking to convert my 401K to Roth IRA and withdraw after 5 yrs (just contributions) to avoid penalty or any tax.

    Is this good option? OR is there any way to avoid / reduce my early withdrawal penalty? I might retire outside of US.

    Thanks in Advance,

    LV

    • ANSWER:

  10. 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:

  11. QUESTION:
    Should I contribute more to a PRE-TAX invest. acct like 401K or into a POST-TAX invest. acct like Roth IRA?
    The fees for my POST-TAX(income tax) Roth IRA is only a month for 6 free investments and I have wide range of ETFs and stocks to choose from. I can take money out but with some penalities and or none at all based on the rules. I anticipate making a huge withdrawal to pay for a house.

    The fee for my PRE-TAX(income tax) is .50 for every K but I have a small range of funds that I can invest in. I can’t take the money out of this account until i retire. There are certain rules that allow me to take the money out for things such as purchasing a house, but I would have to pay that money back. So it’s like taking a loan out on my own money.

    What would be more beneficial for me?

    • ANSWER:
      You may want to rethink the idea of taking anything out of a 401(k) because if you leave the job, the money needs to be back there ASAP–there are penalties, etc. associated with that.

      As for a Roth IRA, I prefer maxing out IRAs whenever possible because you have more choices and freedom with an IRA than a 401(k). IF your employer offers something in matching for a 401(k) it’s probably worth contributing to max out what he’ll put in as it’s effectively free money.

      I think you need to read this, though, as if I’m following you, I think you may believe you can pull money from either kind of account for a house without worries–there are conditions in both cases:

      http://www.kiplinger.com/columns/starting/archive/2006/st0309.htm

      Good luck!

  12. QUESTION:
    Can you take a reduced salary from your employer and receive a higher dividend contribution to your 401k?
    I am considering going back to work for my family business. Let’s say they are going to be paying me 60k per year. Can I take a reduced base salary of 30k and have them give me an annual dividend of 30k that goes straight to my roth 401k plan? Is this legal and do other people do this? I will still probably contribute the max ,500 per year from my base salary which will keep me under the contribution limit of k per year from the employee and employer. It seems as though this would be legitimate because the dividend of 30k will not exceed my 30k base salary since the rule is the employer can only contribute up to 100% of your salary. Also, is there a special company 401k plan that needs to be set up for the employer to make dividend contributions like this? Will the dividend be tax free for me since the company has already paid taxes on the income? Serious responses only please, thanks a lot!

    • ANSWER:
      You asked this question 13 hours ago and no one has given you an answer yet! Now I know the reason…It’s impossible to answer!!!

      I just spent about an hour reading IRS documents and publications (sort of like watching paint dry) trying to find an answer for you. What I found is that you need to talk to the administrator of the 401(K) plan your family business currently uses.

      There are certain restrictions on 401(k) plans having to do with non-discrimination, employee eligibility, etc. that may make what you are asking about impossible under their current plan. Here’s one of the publications that discusses 401(k) plans;
      IRS Publication 560

      http://www.irs.gov/publications/p560/index.html

      One of the rules that I’ve found comes up often is that the way the company contributes to employees 401 accounts has to be uniform and not show favoritism. In other words, for them to do what you are suggesting, they would have to do the same thing for everyone else.

      Having said that, it is possible to do what you asked, but there is no way to know from where I’m sitting. Keep in mind that there are other alternatives your company can use to contribute to the retirement funds of certain employees – so called “top heavy” plans, stock options, profit sharing, etc as well as other ways of compensating you like health savings accounts and so forth.

      I’m sorry I am not better versed with these plans as they can get pretty complex. I’m much more familiar with 401(k) rollover procedures than I am with the minutia of the various plans themselves. I could spend 6 hours reading IRS documents and still not be able to help you because I don’t know anything about the plan you have. The best suggestion I could make is, as I said above, for you to talk to the company that administers the plan your family business participates in, be that Fidelity or Vanguard or whomever. They would be the ones that can tell you in detail the type of provisions allowed. Someone at your company has the name of the representative who set it up in the first place and/or the current advisor in charge of it.

      I’m sorry I wasn’t any more help, but I hope I’ve at least pointed you in a direction that can answer your questions more accurately than you are likely to find on Yahoo Answers.

  13. QUESTION:
    RMD’s – does someone 75 years old need to take rmd’s out of a 401K?
    I know they have to take it out of the tax-deductible IRA starting at age 70 1/2 or so.
    But not out of the ROTH.

    But can you let money sit in a 401K until whatever age you want to take it out?
    Or does that also follow RMD rules.

    Excuse me, I’m young, and just learning.
    I love to learn.
    Why the government forces you to take money out – baffles me.

    • ANSWER:
      Yes, unless you’re still working for the company, in which case RMDs may be delayed until April 1 of the year after you retire. Check with the Plan Administrator to find out if the Plan allows it.

      Otherwise, 401(k)s follow the same RMD rules applicable to IRAs.

      Incidentally, while Roth IRA owners need not take RMDs, Roth beneficiaries do!

      Hope that helps.

      PLEASE VOTE to avoid a TIE. 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, nor shall it be considered a solicitation for business. Questioners are urged to consult with their professional advisers before making any decisions regarding their finances.

      Bradley Mann, CFP®, EA, BCE, CFS, AAMS
      Certified Financial Planner™ Practitioner
      Enrolled Agent | Admitted to Practice before the IRS
      Board Certified in Estate Planning

  14. QUESTION:
    i can’t take money out of my 401K?
    OK I know the first answer will be don’t touch it, but here is what the deal is. I have a retirement account in my name that has several hundred thousand, that is my main retirement. I have a 401K, however with around 25K that I want to transfer out of my employer’s and into a new roth ira on my own. My employers choices of investments are horrible and have done worse and worse each year. However, they tell me that I can only recieve MY money if if either quit, or am being forclosed on my home, or other defined urgent need. Can they really do this? Can they, or the rules that govern 401K’s restrict my access to my money?

    • ANSWER:
      If there is no provision in the plan for in-service distributions or loans, then yes, your only options are to terminate your employment or get qualified for a hardship distribution.

      If you don’t like the investment options, stop contributing. Or just use the money market option.

  15. QUESTION:
    Roth or traditional IRA help please?
    My wife is a stay at home mom, she does not have any income. Can she still put money in an IRA? Are the rules different if we are talking about a traditional or Roth IRA? Does it matter that I (her husband) have a 401K at work? Are there annual limits? I guess I could put the money in my name, not so sure we want to do that. Any reference material out there? Thanks for any help.

    • ANSWER:
      Go to irs.gov and get publication 590.
      As long as one of you works, you can put money into an IRA under her name.

      Yes, there are annual limits (particularly because you *do* have a 401K).

  16. 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

  17. QUESTION:
    How does Wash Sale rule affect 401K?
    If you sell stocks in mutual funds in a non-retirement account at a huge loss, and continue your contribution toward other mutual funds you held in your 401K, can you still claim the loss?

    Based on IRS publication page 56 verbiage about Wash Sale, it looks like you can still claim the loss because the publication says “4. Acquire substantially identical stock for your Individual Retirement Account (IRA) or Roth IRA.” IRS publication 550 for tax year 2009 mentions nothing about 401K, and 401K is not an IRA so I think I can still claim the loss. It may change for tax year 2010. Hopefully not. Can anyone advise? Thank you.
    the tax lady: common sense is that you are probably right, but when it comes to rule/law/legislation, the wording have very literal meanings. If it doesn’t say 401K, then it would mean that 401K is not included, but I will have to call IRS customer service and ask next week. Anyone else know better?

    • ANSWER:
      No earnings or losses are claimed on a 401k. Wash sale rules dont apply. It is a totally different entity. There are different rules for 401k, IRA, and Roth IRA.

  18. 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:

  19. 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.

  20. QUESTION:
    Should I have my wife with her lower income contribute into Roth IRA instead of me? ?
    I am currently 23 and make 60k/yr. My wife is also 23 and currently without a job, but I estimate her income will be between 20-30k/yr. I am currently contributing 10% of my income into a traditional 401k and have been debating contributing to a Roth when it occured to me that SHE should contribute to the Roth because her tax bracket is lower than mine, providing the better tax deal. Would this play out how I imagine it would, or is there some rule with IRA that married couples are taxed at their combined income instead of individual when contributing?
    It seems people don’t understand what I am getting at. Lets say I am in a 25% tax bracket and she is in a 15% tax bracket. If she contributes 5k a year into a Roth at her tax rate it would be 4.25k, while if I contributed 5k at my tax bracket into Roth it would be 3.75k towards our retirement. My question is does this infact happen, or does it go by your married joint income when determining your tax bracket?

    • ANSWER:
      It does not matter who contribute to the Roth IRA and besides, you and your spouse only have one common tax rate and the money contributed to the Roth IRA is after-tax money.

      I encourage both of you to open a Roth IRA account so one for yourself and one for your wife. There is no Joint IRA because the “I” in IRA means Individual so you can only have your own Roth IRA and so is your wife. Now remember, there’s a contribution limit each year on IRA so don’t over-contribute.

  21. QUESTION:
    investment strategies when household income of 220k?
    What are some investment tools used by people in this bracket? We have been discussing a max contribution to our 401k accounts, but it seems that we should do more than just this (IRA, CD, Money Market, real estate). What is a good rule of thumb for an emergency savings account? My wife and I are unable to invest in our roth IRAs due to AGI restrictions. What do we need to do with our current ROTH investment that requires 50 dollars per month?

    • ANSWER:
      My advise is to speak to several different Financial Adviser’s.
      Ask them many questions. Like how long have they been in their position? Have they ever had any complaints filed against them?

      Emergency Funds of 3 to 6 months of expense’s.

      Now for the Roth IRA you mention that you can’t invest in your Roth Ira’s because of AGI restrictions, but you turn around in the following sentence and asking what do you need to do with going into a Roth investment. If you max out the Roth then you will have to find somewhere else to put the money.

      Pay off your home if you haven’t done so, that way you will have one less stress in your life.

      Again, chat with an Financial Adviser and good look in your decisions.

      Don’t forget about Term Life, get 5 to 10 times your pay.

  22. QUESTION:
    severance check advice — experienced replies please?
    my question is what to do with a 50k severance check i recently received. working in same industry as before making same salary (just under six figures).

    i own a rent house on which i owe 25k. total payment for it is 430/month but i rent it for 650/month. my loan is through a local bank… 8% interest… 15 year loan… been paying 0 extra every month since loan began. could deposit 25k into CD and borrow at 2% above what they’re currently paying (~2%).

    my own house payment is ~1800/mnth (600/month of this is taxes). our loan is 5 years old/we haven’t missed a payment/don’t intend to. loan is for ~200,000 at 5.25% for 30 years. would consider refinancing to another 30-year at 4-4.5% but dont’ know if A) could find rates like this or B) if it’d be cost-effective to do so (closing costs, etc.).

    contribute about 4% to 401k.

    have ~80k in roth iras, traditional iras and individual stocks.

    have two kids. have not begun college savings plan for them.

    own car on which we owe 9k (about 320/month).

    where to start? pay off car first, put that extra 320 toward rent house? pay extra on house or is it worth it? gotta set up college 529 or other plans for college – what do? contribute to roths? beef up 401k?

    main goal: be out of debt. can follow dave ramsey’s rules.

    any/all SMART advice appreciated.

    • ANSWER:
      A couple of things Dave would tell you.

      You don’t OWN your car if you OWE K on it.

      If you have paid on your home for 5 years, you should never even think about refinancing for 30 years. 15 maybe, but you don;t want to drag this out forever.

      You talk about investing in a CD and borrowing. Dave would never consider that.

      If I were you, I would pay off the cars and rent house, invest a little for college, and use the rest as my emergency fund.

  23. QUESTION:
    Personal Finance………..?
    1. Match the following words to its correct definition.
    A. General and progressive increase in prices
    B. Investment in which you are loaning money for a certain time period to the issuer
    C. Individual retirement account in which a person can set aside after-tax income up to a specified amount each year, earnings are tax-free, and tax free withdrawals may be made after age 59 1/2
    D. Distributions of profit a company pays you because you own stock in that corporation
    E. Supplemental retirement system in the United States
    F. Individual Retirement Account
    G. The amount of money you make on an investment in relation to the amount of time your money is invested stated as an annual percentage
    H. Quick and easy way to estimate how long it will take for you to double your money
    I. Type of tax-qualified deferred compensation plan in which an employee can elect to have the employer contribute a portion of his or her cash wages to the plan on a pretax basis
    J. Retirement plan for certain employees of public schools, employees of certain tax-exempt organizations and certain ministers
    K. An exchange where security trading is conducted by professional stockbrokers
    L. The age at which someone stops working permanently
    M. Asset purchased for profit
    N. An arrangement to provide income to people when they are no longer earning income
    O. Collection of financial securities (stocks, bonds, cash) that is managed by a company or a person on behalf of many investors

    Rule of 72
    Dividend
    Mutual Fund
    Bond
    Stock Market
    Rate of Return
    Inflation
    Pension
    Retirement
    Social Security
    IRA
    Roth IRA
    401K
    403b
    Investment2.

    How do mutual funds reduce risk?
    A) They invest in stocks
    B) They provide investment diversification
    C) They use an investment manager
    D) None of the above

    3. Your grandpa is 62 and asks you if he is eligible to collect Social Security. What do you tell him?
    A) He could collect his full payment now.
    B) He could have started collecting at age 59 1/2.
    C) He can receive reduced payments now.
    D) None of the above.

    4. Which type of account is usually used when employees can have a matching contribution from their employer?
    A) Roth IRA
    B) Traditional IRA
    C) 401k
    D) 403b

    5. In the future, you and your friends plan to receive Social Security after you retire. At what age can you currently plan to receive full benefits?
    A) 59 1/2
    B) 62
    C) 65
    D) 67

    6. Which type of individual retirement account should you choose if you want your contributions to be tax deductible?
    A) Roth IRA
    B) Traditional IRA
    C) 401k
    D) 403b

    7. When you reinvest dividends,
    A) you will receive them by check
    B) you will receive them by direct deposit
    C) the dividends are deposited into a Certificate of Deposit
    D) the dividends are used to buy more shares of stock

    8. Bonds are known as
    A) fixed income investments
    B) equities
    C) dividends
    D) no load mutual funds

    9. When you purchase stock in a corporation
    A) you are loaning money to the corporation
    B) you are technically becoming a part owner of that corporation
    C) you do NOT earn the right to vote on the direction of the company
    D) you have to own the stock for at least one year before you are allowed to sell it.

    10. Which of the following is the oldest measure of the U.S. stock market and the most widely used indicator of stock market activity?
    A) The NASDAQ
    B) The S&P 500
    C) The Dow Jones Industrial Average
    D) The Russell 2000

    11. The total value of the securities a mutual fund owns divided by the number of shares outstanding is known as the mutual fund’s
    A) Face Value
    B) Net Asset Value
    C) Market Value
    D) Yield

    12. Mutual Funds called “load” funds charge a high flat fee whyou purchase the fund or sell the fund.
    A) True
    B) False

    13. TD Ameritrade is an example of a full-service brokerage company.
    A) True
    B) False

    14. Treasury bonds are considered to be more risky than owning stocks.
    A) True
    B) False

    15. A Roth IRA is beneficial because your withdrawls are tax-free.
    A) True
    B) False

    16. IRA stands for Important Retirement Assets
    A) True
    B) False

    • ANSWER:
      That’s a lot of questions. If you care to email me any particular ones you are having trouble with, I’d be glad to help you. Or, if you email me your answers, I’d be glad to check them over for you. Good luck.

  24. QUESTION:
    Investing for Retirement?
    I am a recent college graduate who has landed his first job. I have been told that a general rule is to save 15% of your income for retirement. My company has matching funds where if I put in 9%, they will contribute 6% to get the 15%. I understand the basic differences between a 401k and a Roth IRA, but I really don’t know what the best option for a young man with lots of time before retirement is. What are the current opinions of the financial wizards?

    Thanks

    • 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