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Posted by AnswerSeeker on June 18, 2007, 9:27 am
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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?
2. I think companies such as C Schwab, Edward Jones or a
bank will handle the paperwork and the process for me. Is
it true?
3. 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 by the end of this year. With my
situation, is an IRA better or ROTH IRA better, or does it
make any difference?
4. Since the amount is not much, should I just get a CD or
should I get a mutual fund?
5. 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.
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Posted by Phil Marti on June 19, 2007, 9:29 pm
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> 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.
Don't assume. Ask AIG.
> 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?
What you want to do is arrange a direct transfer from AIG to
your IRA custodian. Otherwise they must withhold 20% for
income tax, and you'd have to come up with that amount of
cash to complete the rollover. See IRS Publication 590. As
long as you complete a direct transfer there is no taxable
income or penalty.
> 2. I think companies such as C Schwab, Edward Jones or a
> bank will handle the paperwork and the process for me. Is
> it true?
Yes. Once you've selected an IRA custodian they'll guide
you through the process.
> 3. 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 by the end of this year. With my
> situation, is an IRA better or ROTH IRA better, or does it
> make any difference?
If you don't anticipate any taxable income for 2007 and your
account is worth only $6,000 definitely go Roth. You'll
still not have enough taxable income to have to pay
anything, and future earnings will be tax-free as long as
you meet the requirements for qualified Roth distributions.
See IRS Publication 590.
> 4. Since the amount is not much, should I just get a CD or
> should I get a mutual fund?
That depends on when you think you'll need the money. If
it's further away than 5 years, I'd go with something more
aggressive than a CD.
> 5. 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?
See the instructions for lines 15 and 16 of the 1040.
--
Phil Marti
Clarksburg, MD
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ------------------------------------------------------- >>
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Posted by rlsusenet@NOSPAMPUHLEEZschnapp on June 19, 2007, 9:29 pm
Please log in for more thread options AnswerSeeker wrote:
> 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?
You would have to ask them whether they will charge a fee
for selling the funds. Many 401ks waive the loads on their
funds. If they do want to charge for sale, you might want
to look into having them transfer the mutual fund shares
rather than the cash (assuming you are funding a rollover
IRA at a brokerage that can accept fund shares).
You can open a rollover IRA at most brokerages. The
brokerages, such as Ameritrade, are very happy to have you,
and once you get above a certain level of assets, won't
charge you any annual fee.
Open the account at a brokerage (I greatly prefer discount
brokers, and invest in index funds or ETFs). Then, you give
the account number to your former employer's plan
administrator, telling them to write the check to your
rollover IRA brokerage account "FBO" your name or account
number. You won't have any withholding or penalty.
> 2. I think companies such as C Schwab, Edward Jones or a
> bank will handle the paperwork and the process for me. Is
> it true?
Some of it. You need to open an account there and tell them
you will be funding it by direct rollover. Then you need to
direct your 401k administrator to perform the direct
rollover.
> 3. 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 by the end of this year. With my
> situation, is an IRA better or ROTH IRA better, or does it
> make any difference?
If you're still talking about your 401k rollover, I don't
think you have a choice. A rollover to a conventional IRA
is the way to go, since you are funding it with pretax
dollars.
> 4. Since the amount is not much, should I just get a CD or
> should I get a mutual fund?
What you buy is not so much a function of how much money
you've got. It's a function of how soon you're going to need
that money, and how much risk you are willing to assume.
> 5. 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?
So long as the direct rollover is handled properly by the
companies involved, you should have neither reporting nor
taxes. Keep copies of all requests and statements, so that
you can prove it was a direct rollover. That's just in case
somebody screws up and the IRS questions the transaction.
It has happened to me, once.
Make sure that any distribution check is written to the
company that will manage your new IRA -- if the check is
written to you, things get more complicated (they'll
withhold 20%, which you will have to pay from your own
pocket when funding the rollover IRA, to avoid penalties).
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ------------------------------------------------------- >>
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Posted by joetaxpayer on June 19, 2007, 9:29 pm
Please log in for more thread options AnswerSeeker wrote:
> 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:
Yes, you should transfer the money. Schwab will help you
through the paperwork, and the ex-employer will either send
the money directly there, or as mine did, sent a check to me
payable to "joetaxpayer for further deposit to charles
schwab acct # IRA". It should not be payable directly to
you.
Once transferred, you should convert to the Roth, as with no
income, you still have a standard deduction and exemption,
so even though you'll claim this as income upon conversion,
no tax would be due (and no penalty to convert to Roth.
JOE
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ------------------------------------------------------- >>
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Posted by Herb Smith on June 19, 2007, 9:29 pm
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> 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?
Not exactly. Converting the mutual funds to cash will be
taken care of by the plan adminstrator. If transferred
directly to the IRA custodian, there will be no tax or
withholding taken out. Incidentally, a tax deferred account
(like a 401K or IRA) does not generate capital gains.
> 2. I think companies such as C Schwab, Edward Jones or a
> bank will handle the paperwork and the process for me. Is
> it true?
Yes, those and scores of other financial institutions, such
as Vanguard and Fidelity.
> 3. 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 by the end of this year. With my
> situation, is an IRA better or ROTH IRA better, or does it
> make any difference?
A rollover from a 401k can only be made to a traditional
IRA. Conversion to a Roth IRA, if desired, is a separate
transaction.
> 4. Since the amount is not much, should I just get a CD or
> should I get a mutual fund?
Since these are supposedly "retirement funds", not to be
tapped for many years, do you want your investment to grow
(mutual funds) or just return a stodgy 4-5% for a long time?
> 5. 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?
Partially correct. The rollover transfer from the 401k to
the traditional IRA is tax free, and reported as such on
line 16a/b of your 1040 form. Conversion of the IRA to a
Roth IRA is a taxable event, subject to ordinary income tax
(but not penalty), and is reported on line 15a/b of the 1040
form.
> Thank you for your help in advance.
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ------------------------------------------------------- >>
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