401K Plan Conversion - What Should I Do?

I have a 401K plan that's worth about $6,000 from my ex-employer and the money is spread among 3 mutual funds. The plan administrator (AIG) wrote to tell me that they will start charging $150 a year to maintain my account. The fee is pretty steep for an account with just a few thousand dollars. I am considering to move the money to another company/bank to open an IRA or ROTH IRA there. Here are my questions:

  1. I assume that I'll have to "sell" the mutual funds and AIG probably will charge me a selling fee. If I ask them to send the check directly to another company/bank to open an IRA or ROTH IRA within 60 days, I won't have to pay ordinary income taxes or capital gain taxes and the 10% penalty?

  1. I think companies such as C Schwab, Edward Jones or a bank will handle the paperwork and the process for me. Is it true?

  2. I am currently on workers comp due to a work related injury and do not any earned income. It is likely that I won't have any earned income by the end of this year. With my situation, is an IRA better or ROTH IRA better, or does it make any difference? I was told that a 401K plan can only be rolled-over to a traditional IRA. Then I can convert the traditional IRA to ROTH IRA. If this is the case, is it worth to do so given I won't have any earned income this year?

  1. Since the amount is not much, should I just get a CD or should I get a mutual fund?

  2. I assume there won't be any tax consequences for the transfer from
401K plan to an IRA/ROTH. Will I still have to report the "transfer" on the income tax form at year end? If so, how will I report it?

Thank you for your help in advance.

Reply to
AnswerSeeker
Loading thread data ...

The fee is outrageous. The whole point of it is probably to get you to move the money out, which you really probably want to do anyway.

You'd roll it into a regular, traditional IRA, not a Roth IRA. You may be able to *convert* that traditional IRA into a Roth

*afterwards* (depending on your income, etc), but the rollover will be to a regular IRA. If/when you make the conversion, you'd have to come up with cash to pay income taxes on the amount converted, which may still be very well worthwhile, but it's kind of a separate question.

They shouldn't, and none of the 401ks I've worked with had anything like that, but it's possible. They may also (or instead) hit you with an account closure fee, but I've not seen that on a 401k either.

That's correct. You'll probably have to fill out a form and it'll have a place for you to check a box or something where you specify that it's a rollover to an IRA and even a place for you to fill in the name, address and account number at the new custodian. The new place where you want to open the account will normally let you fill in their forms and open the account and give you an account number to provide for the old custodian to use. The new account form will have a section like "How am I going to fund this new account? []cash []transfer []rollover". Check that last box and they'll give you some time to get the rollover in motion.

They'll open the new account for you, but you have to handle the form (very possibly requiring a Notary!) for your

401k provider. It's usually a pretty straightforward form, maybe a page or two long.

You don't have a choice - a 401k rollover can only be rolled into a traditional IRA. However, if your income is very low this year, it may be a good year to *then* roll that IRA into a Roth. The brokerage where you open the new IRA should be able to help you with this.

The amount isn't the issue (inasmuch as it's plenty to get above the minimums in most funds). The question is how does it fit your plans and asset allocation. Do you need a CD?

You'll get some standard tax-related forms. Some numbers may be entered into your tax forms. If you do only the 401k->IRA, you won't have any tax consequences (ie. taxes to pay) but if you then do the IRA->RothIRA, you will likely have to pay some taxes in addition.

Reply to
BreadWithSpam

You'll have to read your plan literature to see whether AIG charges a fee for either selling funds or an outgoing account transfer.

It is possible that you *might* be able to transfer the funds in kind to an IRA at a brokerage, if both the brokerage and AIG permit it. You'll probably have to call and ask a human at both ends if that is possible. If not, then, yes, your holdings will be liquidated .

Yes, that's correct. There's never any "capital gain taxes" on 401(k) distributions, BTW; the entire amount is taxed at your regular income tax rate.

Yes. Just about any brokerage or mutual fund company will be glad to get your IRA account, and will give you a form to fill out to authorize a direct rollover once you open the account. If AIG charges a fee for an outgoing account transfer, you might also ask your new IRA custodian if they will pay that fee for you.

If you're in a 0% tax bracket, a Roth conversion is definitely a good idea. If you're in the 10% or 15% bracket, it's a good idea provided that you have money from other sources to pay the taxes due. Once the money is in a Roth, you'll never pay taxes on it again, whereas in a traditional IRA you'll have to pay taxes at your regular income tax rate on withdrawals.

Anyway, yes, the procedure is that you do a rollover to a traditional IRA, and then do a Roth conversion on the IRA. You can't do the rollover and Roth conversion in one step.

You didn't say when you anticipate wanting to withdraw the money, but if you're still 5+ years away from retirement, you should probably choose an investment that's going to grow more than a CD. $6000 is well above the minimum limits for investing in many good mutual funds. If you don't know where to start in picking a fund, you might choose one of the all-in-one "target retirement" funds, or a good balanced fund, for instance. Or you could go the do-it-yourself route and pick

3 funds in the same asset classes that you currently hold in your 401(k), if you're happy with that allocation.

I can't remember offhand if you get any kind of 1099 on a direct rollover from 401(k) plan to IRA. In any case, that is not taxable income. You'll definitely get a 1099 from your IRA custodian for a Roth conversion. On the front page of Form 1040 there's a line to report taxable IRA distributions, and that's where it goes.

-Sandra the cynic

Reply to
Sandra Loosemore

BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here. All logos and trade names are the property of their respective owners.