Help with 401k to IRA

Anything goes. But keep it civil, please.

Moderator: lvergon

dyad8
Posts: 10
Joined: Thu Jul 12, 2007 7:28 pm
Location: North Carolina
Contact:

Help with 401k to IRA

Postby dyad8 » Mon Dec 10, 2007 2:44 pm

I am in the process of changing jobs. Since I have been at my current job only two years I have about $2000 in my 401k. I know I could roll that over into a tradition IRA account and not have to pay any penalties. Another option is starting a Roth IRA but I would have to pay taxes on the money I roll over from my 401k which would be about $300. The last option is to cash out my 401k to pay off debt which I still owe about $14000. I have paid over $3000 off on my debt this year and have a good system in place to keep paying debt down.

My new job comes with about a $10000 a year raise of which I plan to use mostly to keep paying debt down. No matter what I am going to establish an IRA account, I am just wondering which road I should take. Any advise or examples would be appreciated. Thanks
Justin Golds
Digging myself out of debt one inch at a time.

http://dollarandsense.net

User avatar
pf101
Posts: 859
Joined: Wed May 30, 2007 11:23 am
Location: Portland, OR
Contact:

Postby pf101 » Tue Dec 11, 2007 12:00 am

I would definitely not cash it out.

IMO, your best bet is to do a rollover IRA at either Vanguard or Fidelity and, if you have the money to cover the extra taxes and you're relatively young, convert it to a Roth. It's a small enough amount that just getting it converted may not be a bad idea. Especially if you're young.

dyad8
Posts: 10
Joined: Thu Jul 12, 2007 7:28 pm
Location: North Carolina
Contact:

Postby dyad8 » Tue Dec 11, 2007 8:11 am

I am only 25 so I still have years to go. After some research last night, I believe I am going to roll it over into a Roth IRA and just pay the taxes on it since it is such a small amount.
Justin Golds
Digging myself out of debt one inch at a time.

http://dollarandsense.net

NoBoB
Posts: 317
Joined: Sun Oct 14, 2007 11:10 am
Contact:

Postby NoBoB » Tue Dec 11, 2007 8:40 am

NoBoB != tax expert, so verify on your own :)

IIRC, you can't rollover directly to a Roth. You have to roll to a rollover IRA, then do the Roth conversion. If you take the distribution in cash, thinking "I'll just toss this in the Roth and pay the taxes", you'll also have to pay the 10% early withdrawal penalty. That's another $200.

The receiving custodian should be able to make this a relatively painless procedure for you (well, as painless as paying $300 in taxes can be :P )

User avatar
pf101
Posts: 859
Joined: Wed May 30, 2007 11:23 am
Location: Portland, OR
Contact:

Postby pf101 » Tue Dec 11, 2007 11:41 pm

nobob is correct. As it currently stands you cannot roll directly to a Roth. You have to first move it to a Rollover IRA then convert it to a Roth. It's pretty painless. Just tell your new brokerage what you want to do and they'll set it up.

As for the $300 in taxes, the least painful way to cover it would be to have an extra $25/month taken out of your paycheck. Then you've pre-paid. Alternatively, if you have the willpower, you could save the $25/month into a 'tax fund' and earn interest on it until it's time to pay.

Just depends on how you like to manage your money.


Return to “General Discussion”

Who is online

Users browsing this forum: No registered users