401k and IRA question.

You can only roll over a 401(k) after you leave a job. It sounds like you're still with that company.

Would a traditional IRA be deductible for you? If not, then it's no question, the Roth would be better.

Brian

You have two things going on; If you had earned income in 2007, you may deposit the $4,000 into an IRA. How much did you earn in 2007? Do you think you will find a new job in 2008? I suggest the deductible IRA for 2007, and request a direct transfer of the 401(k) money into that account this year. My opinion on Roth is that people earning low incomes (15% Federal bracket or lower) may be better off with a Roth, others should convert based on changes in bracket. Maybe you were in the 25% bracket in 07. $4000 will get you back $1000 in taxes. In 08, if you are not employed a few months, you may be in the 15% bracket. You convert and pay $600 in tax. You are ahead $400. This is a simple example, but should help illustrate my thoughts. If you have any follow on questions, come back. Those here are kind, knowledgeable, and wish to help.

Joe

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Did you make any IRA contributions in 2007 already (for tax-year

2007)? (since it was possible to make a contribution in 2007 for tax-year 2006). If not, you may still make a 2007 contribution.

Were you working someplace in 2007 where you had access to an employer-sponsored plan (ie. 401k)? If not, then that 2007 contribution may be deductible on your 2007 income taxes. Or you may be able to make a 2007 Roth contribution (very likely a better idea, especially if your tax bracket in 2007 was low). But bear in mind that you have to have earned money in 2007. Did you?

If you're no longer with that company where you made that 401k contribution, you may roll that money over into an IRA, or into a Roth IRA, though if you roll into a Roth, you'll have to pay taxes (2008 taxes - not due for a year) on that money.

Sure - why not? There are times when one is eligible to put money into one but not the other.

That's actually a risk-lowering move we call "tax diversification"

Many brokerage will help you set up a rollover IRA, easy piecey. Try Fidelity or Schwab. I rolled my 401K into a rollover IRA acct at Fidelity. You can have many combinations of IRA and Roth IRA in your portfolio.

I hope you find a job real soon, if not already.

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Doesn't the IRA have to be established by 12/31/07 to make 2007 contributions?

Elizabeth Richardson

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No, basically tax day.

Brian

No, there are some plans that do require that, but IRA has tax day deadline, whenever it falls. Joe

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Ok, maybe they've changed it. It used to be that to make a 2007 contribution in 2008, you had to have established the account by 12/31/07. You couldn't open an account in 2008 and fund it for 2007 (or 2006, or some other prior year). I know that for an already established account you can back fund it.

Elizabeth Richardson

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Well, I just searched a bit, and found that a Self-Employed 401(k) has a deadline to open by 12/31. And Roth conversions must happen by 12/31 as well. And RMDs for IRAs.

Here's my question back to you - will a broker open a zero balance IRA? There are those who, even by 12/31, don't know if they can deduct the IRA, and are inclined to wait till March to open one, or deposit to a new one. I guess once the account is open, this discussion is moot beyond that point. If nothing else, this continues to prove my point, "too many retirement accounts, too many rules." Joe

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I don't know about brokers - don't have any use for them. I know the big mutual fund houses will, and if you're just starting out investing, you probably shouldn't be buying individual issues anyway.

Elizabeth Richardson

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Thanks everyone for the replies; my questions got answered.

@joetaxpayer: To clarify let me state this first, for 2007 tax year I was in the 25% tax bracket and I am assuming I will be employed soon.

You mentioned that if I was unemployed for some time during 2008 and fell in the lower 15% tax bracket I would, "... convert and pay $600 in tax. You are ahead $400." Can you elaborate that example? I am not sure what I would be converting.

Also a "deductible IRA" is that a traditional IRA?

Thanks.

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Joe is giving you excellent advice.

To elaborate- the 401k and IRA are seperate entities (I think you knew that).

The IRA could be either traditional deductable IRA, a traditional non deductable IRA or a Roth IRA.

If you are in 25% tax bracket and eligible for the deductable, Joe's advice was to do that. If you are in 15% tax bracket and eligible for the Roth Joe's advice was to do that.

unless I misinterpreted his advice. In general, opt for the Roth over a traditional non deductable IRA.

Rollover- a rollover IRA just keeps the tax deferred status of the

401k. It does not affect the status directly for any of the above.

I have a Roth and a rollover. Both with around 50k in them. It is OK. I might choose to convert the Rollover to a Roth a little bit at a time as part of tax planning each year, but that is not important to this discussion.

Joe did mention doing a rollover to Roth conversion as tax and investment planning going forward. Good advice, I would start simple.

Look at what taxable income is on the tax return- this established tax bracket. Depending on if you are married or single will affect what rate is applied to that taxable income.

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The 401K adminstrator may force you to rollover the 410K if the amount is too small. Saves them adminstration overhead.

Yes. But that is often due to income eligibility constraints. In good years you may not qualify for the a Roth.

Furthermore, because you were covered by an employer's retirement plan for at least one day in 2008, an IRA is not deductable if you make more than $62,000. A Roth has a higher limit.

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I opened a new Roth and funded for the prior year and that year back around 2002 or so.

Brian

Check IRA rules on this- there was a change for tax year 2007. An IRA can be deductable if AGI is under ~103k.

"Modified AGI limit for traditional IRA contributions increased. For

2007, if you are covered by a retirement plan at work, your deduction for contributions to a traditional IRA is reduced (phased out) if your modified AGI is:

More than $83,000 but less than $103,000 for a married couple filing a joint return or a qualifying widow(er),

More than $52,000 but less than $62,000 for a single individual or head of household, or

Less than $10,000 for a married individual filing a separate return."

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A traditional IRA may or may not be deductable. In order to be deductable you must be under certain income and meet other requirements.

see pub 590 from IRS

and read "what new in 2007" which is quoted in my reply to another poster on this thread below.

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Thanks for the replies, its helpful!

I am a little confused about when the term "rollover" is used in the context of an IRA. The term seems to be used as verb and a noun. For instance, if money is rolled over into a traditional IRA account, would this account now be considered a "rollover IRA account"? Or would the account still be considered an IRA account that tax deferred money (from a 401k) got "rolled over" into it?

Also PeterL mentioned about rolling over a 401k into a rollover IRA in this thread thru Fidelity, which I also have mine in. But he never mentioned that if this was a direct transfer. If it wasn't a direct transfer what risk or loss if any resulted?

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snipped-for-privacy@yahoo.com wrote on [Fri, 14 Mar 2008 04:25:17 -0500]:

It's a traditional IRA with all the benefits of an IRA, however it's called a Rollover IRA if it only contains funds that were rolled over into it.

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YES

YES, but first phrasing is more common way to communicate where IRA came from.

The question "what risk or loss resulted" confuses me.

The 401k account balance gets frozen the day the rollover application arrives. That amount is then transferred to Fidelity. Once at Fidelity it will be invested the way you instructed fidelity to invest.

The risks taken will be a function of the investments chosen.

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