Rolling Over From 401K to (Roth?) IRA + Education

I have been making contributions to both a 401K and IRA for the past

4.5 years, but recently parted ways from the company with which I had the 401K. I have about $79K in the 401K and $14K in the IRA.

I believe that a Roth makes more sense for me long term and would like to roll both into a Roth IRA, but now I need to consider the tax implications.

First, if I use some of the cash from the 401K/IRA to pay the taxes, that would be considered a disbursement for which I would pay a penalty, correct? So I would need to pay those taxes using other means to avoid that penalty.

Second, I will be in school in the fall. Technically, I will be in school full time and working full time (Executive MBA). Now as I understand it, the tuition for an Executive MBA might or might not be deductible, but if I want to deduct it, I should prepare to be audited and be able to make a strong argument that it is truly a business expense, correct?

Third after I am enrolled, can I take a disbursement from the IRA and avoid the penalty by claiming it as being for educational expenses, but then use the money to pay the taxes on the rollover?

Thanks in advance for any help that anyone provides!

Reply to
kramer31
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Timing is everything. Over 150 financial bloggers recently joined up to all write about the Roth IRA in an effort known as Roth IRA Movement. The mainstream press picked up on it as well. I am currently finishing up an article I'll publish over the weekend titled "The 401(k) to Roth IRA Fail."

Pushing 600 words, but here I'll tell you in a sentence or two why the conversion is a bad idea. A $93K jump in income is likely to put you into a higher bracket. You should review what your 'taxable income' is going to be this year, and consider whether converting piecemeal makes more sense. The 401(k) to Roth has no recharacterization option, no do-over. Convert $80K, watch the market tank, and even with $40K left when you do your 2012 return, you owe tax on the full $80K. First transfer to the Traditional IRA, then if you want, convert what you will. But if in 2013, you wish to recharacterize any of it for whatever reason, you still have the option.

Last, converting when the tax must be paid with account funds is usually a bad idea. The penalty is just part of it.

Reply to
JoeTaxpayer

Do you have any non-deductible contributions in the IRA? Ie, was form 8606 filed when you made the IRA contributions. If you do have non-deductible contributions (contributions for which you did not take a deduction), then convert that portion of the IRA to Roth tax free this year, and deal with converting the 401K to traditional or Roth IRA, and the remaining money in the traditional IRA to Roth IRA next year.

Yes, 10% penalty, in addition to federal + state + local taxes on the amount taken out.

If the education expense is in your current field -- ie. furthering your skills

-- then it is deductible as a business or unremibursed employee expense. The latter is subject to the 2% rule and AMT. Are you working in the MBA field while doing your studies, and if so are you paid on a W-2?

Also I wonder if you can the Lifetime credit for part of the studies, and business expense for the other part.

I don't think so.

Reply to
removeps-groups

filed when you made the IRA contributions. If you do have non-deductible contributions (contributions for which you did not take a deduction), then convert that portion of the IRA to Roth tax free this year, and deal with converting the 401K to traditional or Roth IRA, and the remaining money in the traditional IRA to Roth IRA next year.

If one has an IRA with any post-tax money, any conversion to Roth is prorated, i.e. one cannot convert only post tax money to the Roth leaving pretax in the IRA. They pay tax based on the percentage of pre and post tax in their IRA. And IRA = the total of all IRA accounts, separate accounts do nothing to segregate pre and post tax money.

Your advice to convert before flooding the IRA with 401(k) money is sound, but my warning still applies.

Reply to
JoeTaxpayer

You can't do that. The usual pro-rata rules for trad IRA distributions also apply to Trad-to-Roth conversions. The OP says his IRA is worth $14,000. If he had $5,000 in non-deductible contributions in it and did a $5,000 conversion, only $5,000 * ($5,000/$14,000) = $1,786 would be non-taxable while the remaining $3,214 would be taxable.

Reply to
Rich Carreiro

You and Joe are right. Thanks.

Reply to
removeps-groups

Thanks for the detailed discussion and I appreciate the advice. I wasn't really planning on rolling all of it into the Roth immediately anyway, and there are no non-deductible contributions.

What I am really more interested in here is whether I can take a disbursement to cover tuition costs and then use the money that I would have paid in tuition to cover taxes on a rollover portion penalty free.

something?

For Qualified Higher Education Expenses Amounts are penalty free if they are used to cover qualified higher education expenses for the IRA owner and/or his or her dependents. These qualified education expenses are tuition, fees, books, supplies and equipment required for the enrollment to or attendance at an eligible educational institution. An eligible educational institution is any college, university, vocational school or other post-secondary educational institution eligible to participate in the student aid programs administered by the Department of Education. These eligible educational institutions include virtually all accredited post- secondary institutions, whether public, nonprofit or proprietary (privately owned and profit making). The educational institution should be able to indicate whether it is an eligible educational institution.

Read more:

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On a side note, I really wish more employers offered Roth IRAs...

Reply to
Kramer314

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