Financial Advice question

[GoochMan]

I was laid off from my job last month.

Among the many issues I've been working on is what to do with my 401K. It's barely 2 years old, and is in the low, low 5 figures. (Employer was matching until 2009, when everything went to hell and the matching funds dissapeared.)

Now I'm trying to figure out if it's better to roll this over into a traditional IRA or a Roth IRA. Any thoughts from the more financially astute members of SportsJournalists.com on this would be greatly appreciated.

 

[Rhody31]

Take it all out, roll it on black.

 

[HackyMcHack]

If you're young, I'd roll it into a Roth. You'll take a bit of a tax hit on the conversion, but nowhere near as bad as a full withdrawal. (There's a process for this ... I don't know all of the details.) What you will gain is (A) tax-free withdrawals at retirement and (B) more tax law flexibility if you do have to take the money out before retirement.

I've also read that if your employer's match is suspended and/or you've maxed out the match, you're better off investing any additional money in a Roth IRA (up to the max that you're allowed to invest by law) instead of the 401K.

 

[trifectarich]

Wherever you're thinking of putting the money, ask an adviser there to lay out EXACTLY what the penalty is that you'll incur. I don't think it's wise to pay a 10 percent penalty, but for future retirement plans you might get involved in, I'd go the Roth route first if that is made available to you.

 

[The Big Ragu]

I was laid off from my job last month.

Among the many issues I've been working on is what to do with my 401K. It's barely 2 years old, and is in the low, low 5 figures. (Employer was matching until 2009, when everything went to hell and the matching funds dissapeared.)

Now I'm trying to figure out if it's better to roll this over into a traditional IRA or a Roth IRA. Any thoughts from the more financially astute members of SportsJournalists.com on this would be greatly appreciated.

I'm not an accountant. So take my advice for what it is worth.

Definitely roll it over, though, because you have more investment choices in an IRA.

As for traditional or Roth, your age matters. If you are relatively young, a Roth is more powerful than a traditional IRA, because of the power of compounding. A Roth will almost always make more sense. If you grow the IRA a lot, you will be able to take that money at retirement tax-free from a Roth, whereas withdrawals from the traditional IRA will get taxed.

The reason the Roth may be difficult, though, is that the conversion will be a taxable event. You will have to pay taxes up front to do that conversion (in return for the tax-free withdrawals), whereas if you convert to a traditional IRA, you won't face a tax bill today. And being recently laid off, you have to ask yourself, too, if you can handle that tax bill this year.

If that is a problem, you can always convert to a traditional IRA and do the conversion to a Roth from a traditional IRA when your employment situation steadies.

That said, I'd talk to an accountant. I believe the IRS made up some rules that apply to just 2010, with regard to conversions. I am not sure of the specifics, but you may be able to do the conversion and defer the taxes until 2011 and 2012. I'd ask an account or google it for details.

I find the tax rules ridiculously complicated and they constantly come up with new rules and gimmicks, so my personal philosophy is to never sweat decisions that will have their full impact 30 years from now. Who knows if they won't change the rules in other ways over that time, that change everything for you in ways you can't anticipate right now?

 

[mustangj17]

MAKE SURE YOU ROLL IT OVER THIS YEAR!

They will allow you to pay the taxes on the conversion over the course of two years so it will be less of a burden. Pay half of it in April 2011, half of it in April 2012. The IRS rarely has this option, but it is available in 2010. So take advantage of it.

 

[mustangj17]

Yep found the rule:

3. 2010 is the year but not the year the tax is due.
While 2010 is the actual year that you will be able to convert, the income to be claimed can be deferred until 2011 and 2012. Expecting a vast majority to take advantage of this, the IRS has set up special provision on how the tax will be paid. The IRS has granted you the option to claim 50% of the conversion amount as income in 2011 and the remaining 50% in 2012. Keep in mind that this is only in 2010. After 2010 the taxes will all be paid in full the following year going forward.

If you elect to pay the tax over the two year period, keep in mind that the tax rate is determined for that year only. Example, in 2011 you will pay the tax based on your tax bracket for that year. If your income were to somehow sky rocket in 2012, then you will be paying more in taxes that year for the conversion.

What if husband and wife want to convert? Each IRA(s) is tied directly to the Social Security number of the account owner. What that means is that if a husband wants to convert his IRA’s and the wife does not, that’s okay. Further more, if both want to convert, then the husband can choose the two year option on paying the tax and the wife could choose to pay her tax in 2010 (or vice versa). Remember that you have to do one or another. For example, if the husband has multiple IRA’s that he is looking to convert, he can’t choose to pay the tax this year on one IRA, then defer the other IRA for 2011 and 2012.

 

[GoochMan]

Thanks for all the advice. Have a pow wow set up with the accountant this week, and am now fully in the Roth IRA camp (I'm 34, Ragu....still kinda young I guess, and hopefully with a few decades of work yet to come.)

The words of wisdom are very much appreciated.