Taxes

[Sir Sid]

With all the turnover in the sports journalism field, just thought I'd throw a cautious reminder out there.
When i sat down to start figuring Sir and Mrs. Sid's taxes I realized I essentially have to pay income tax on the money that I had to take out of my old newspaper's 401k and and rolled into a new Roth IRA.
While I didn't have a ton in the 401k coughing up an extra 500 bucks will be a nice punch in the stomach this year.
Oh well, as one tax professional put it "at least you won't have to pay taxes on it when you retire."

 

[Ace]

With all the turnover in the sports journalism field, just thought I'd throw a cautious reminder out there.
When i sat down to start figuring Sir and Mrs. Sid's taxes I realized I essentially have to pay income tax on the money that I had to take out of my old newspaper's 401k and and rolled into a new Roth IRA.
While I didn't have a ton in the 401k coughing up an extra 500 bucks will be a nice punch in the stomach this year.
Oh well, as one tax professional put it "at least you won't have to pay taxes on it when you retire."

That's true. Had you rolled it into a regular IRA, you wouldn't have to pay taxes.

 

[The Big Ragu]

But if you are relatively young, the Roth is the way to go. It hurts to pay those taxes right now, but if you can make that money grow through investment or trading, when you hit retirement you can draw from it and not have to hand a penny over to the government. It's a better deal for someone young who doesn't earn a ton of money than a regular IRA is. Also, now that you have paid the taxes up front on your contributions, you are free to draw from your contributions any time you want, if I am not mistaken. I wouldn't recommend it, but any money you put into the 401(K) (not earnings, but your contributions) can be taken out tax-free at any time for any purpose, no questions asked. You already paid the taxes on that money so you are good to go. For example, if you made contributions of $4K, you can use that $4K as an emergency fund and take it out without any taxes or penalty. A lot of professionals recommend funding a Roth that way, even though you don't get the deduction and the money is taxed up front, before putting money into an emergency fund, because it is a de facto emergency fund you can draw from any time you like, and if you never touch it, the earnings on your contributions grow tax free until you retire.

 

[Sir Sid]

Yeah, that's the thing. Like they said on HIMYM, "Future Sid" is going to be happy with this decision. It's just "Current Sid" who is feeling the pain of it right now.

 

[Ace]

Yeah, that's the thing. Like they said on HIMYM, "Future Sid" is going to be happy with this decision. It's just "Current Sid" who is feeling the pain of it right now.

Is there a cap on how much you can put into the Roth in one year if you are rolling it over? Isn't there normally a $2,000 cap?

 

[Sir Sid]

From what I've read there is a cap to how much you can put in if you are not rolling it over.

 

[The Big Ragu]

Yeah, that's the thing. Like they said on HIMYM, "Future Sid" is going to be happy with this decision. It's just "Current Sid" who is feeling the pain of it right now.

Is there a cap on how much you can put into the Roth in one year if you are rolling it over? Isn't there normally a $2,000 cap?

No cap on a rollover. If you are making your yearly contribution, it is $5K since 2008 (was $4K before that). There are also income limits for contributing to a Roth IRA. I believe if you are single and have an adjusted gross income greater than $100K or file joint and have an agi greater than $160K, you can't contribute. Those limits used to also preclude anyone above those incomes from rolling a traditional IRA over into a Roth. But Bush signed a bill a few years ago that lifted the limits -- but just for rollovers. So starting this year, anyone can roll over a traditional IRA into a Roth IRA, provided they are willing to pay the taxes.

I don't want to make you feel bad, Sid, since you already did a rollover into a Roth in 2009. But the smart thing to do would have been to roll over your 401(K) into a traditional IRA and waited, because if you do the rollover to a Roth in 2010, there is a special provision allowing you to spread the taxes out over two years. It was a provision in that bill that Bush signed. You would have waited until this year (2010) to do the rollover, and then instead of paying $500 in one year, you could have paid $250 in 2011 and $250 in 2012, spreading out the tax bite and lessening the hurt a little.