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Subject Author Date
401K Plan Conversion - What to do AnswerSeeker 06-18-2007
Posted by Bill on June 21, 2007, 5:43 pm
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 r123k123@yahoo.com (AnswerSeeker) posted:

> 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 necessary to "sell" anything. Your holdings can simply
be switched directly in a trustee-to-trustee transfer (which
is true for most 401K plans -- but subject to the specific
rules set for each plan). Select your new trustee, and ask
them to help "engineer" the process. Most will assist you.

> 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?

Asked and answered.

> 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 traditional IRA will not result in any income, so no issue
there, and that's the only option you have to convert a
401K. Even if you decide to convert to a Roth IRA, you
first have to "set" the tradtional IRA -- then _convert_ it.

This conversion creates an ordinary income event, which will
result in a 1099R Distribution, and that will be taxable
(though if your total income is low enough, that may not be
a significant issue).

> 4. Since the amount is not much, should I just
> get a CD or should I get a mutual fund?

Can't really answer this for you, without knowing more.
Your age, investment goals, other resources are all factors.
You'll have to make the call, taking everything into
consideration.

> 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?

As noted above, you can't "transfer" a 401K into a Roth.
That would mean a taxable distribution, and -- if you're
under 59 1/2, an additional 10% penalty tax _below the line_
(i.e., beyond normal income taxes, reported on line 60 for
the 2006 Form 1040). A trustee-to-trustee transfer
conversion to a traditional IRA should not be a taxable
event. If a 1099 were generated, it would be reported on
1040 LIne 15a and noted as a "Rollover" with no amount on
15b.

Bill

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<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
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Posted by bono9763@yahoo.com on June 21, 2007, 5:43 pm
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> 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?

The easiest thing is to open the account with your new
company, give them the information about your 401K and they
will transfer all the assets into your new account. Then
there won't be any problem with penalties or taxes or
rolling funds over within 60 days, because you will not
touch the money.

The account will have to be rolled over into a traditional
IRA in order to a remain tax free. When you take money out
at retirement, you pay tax on it then. You can also convert
it to a Roth IRA once it is rolled over into your new
traditional IRA. You will then have to pay tax on the entire
amount now, but when you retire, withdrawals would be tax
free. Since you aren't earning income this year, this might
be a good time to convert it to a Roth IRA and pay tax on
it. The money would be added to any other income and you
would pay tax on the total amount of income for 2007.

When you rollover your 401k, AIG will send you a 1099 next
year which will have to be reported on your tax return. But
none of it is taxable if transferred to a traditional IRA.
Line 16a would report the $6000 and line 16b would be zero,
with the word rollover written to the left of the number.

Whether you invest in a CD or mutual funds depends on how
long you have until retirement and what other retirement
funds you have.

<< ------------------------------------------------------- >>
<< 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. >>
<< ------------------------------------------------------- >>

Posted by Benjamin Yazersky CPA on June 21, 2007, 5:43 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?

look into a trustee to trustee transfer

> 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?

most brokerage houses will help 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?

need to do some tax planning - prepare a projection for 2007

> 4. Since the amount is not much, should I just get a CD or
> should I get a mutual fund?

I don't give investment advice.

> 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?

If it goes to a roth, there will be a tax consequence.

> Thank you for your help in advance.

___________________________________
<<< Benjamin Yazersky, CPA [NJ & NY] >>>
-----> real address on hobokeni or hobokenx <-----

<< ------------------------------------------------------- >>
<< 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. >>
<< ------------------------------------------------------- >>

Posted by kastnna on June 21, 2007, 5:43 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:

For numerous reasons it is rarely wise to leave money with
an old employer. You have less control, access to plan
administrators can be difficult, further contributions are
curbed, fees are often higher in qualified plans (even if
you don't see them outright), fewer investment choices, and
more limited stretch/inherited provisions often exist in
401(k)s.

> 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 can often transfer the securities "in-kind", although I
have seen instances where the original custodian insisted
the account be liquidated (this makes them money).
Converting the 401(k) to a Roth can cause you problems.
Start with an IRA. The roth is post-tax dollars and the
401(k) is pre-tax. You will have to pay ordinary income tax
on the full value of the account if you convert to a Roth.
However, a Roth may be best for you in the long run. I do
not know enough about you to answer that. The 10% penalty
will not apply if the rollover is done within 60 days and
you have not already done a rollover in the past year. A
direct trustee to trustee transfer would be best (no worries
about time limits and no 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?

Any company worth looking at will handle the paperwork.
HOWEVER, many companies have a nasty habit of requiring
their own forms. So you may go to Chuck Schwab, they will
have you open a new IRA and fill out a rollover request, and
they will bid you good day. A week later you'll get a notice
that the rollover was rejected because AIG requires that
their own paperwork be filled out. If they didn't include
the AIG paperwork, you will have to contact them for it and
reinitiate the rollover. If your lucky, none of this will
happen. But I run into it alot. Once you have accumulated a
consensus of good info online, ask the financial planner you
meet with the same questions. If he/she can't tell you this
stuff, walk away.

> 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?

Hard to say. The conversion to a roth may be feasible now
because of your low marginal tax bracket. But things like
cash flow needs, std deduction or itemization, etc could
muddy the waters. Also, is the disability permanent?

> 4. Since the amount is not much, should I just get a CD or
> should I get a mutual fund?

That's a risk tolerance preference that we cannot answer. If
you want a very safe, low return investment go with a CD or
bonds. If you can stomach more volatility and desire greater
returns, go with mutual funds. Investment time horizon will
also be a deciding factor. Vanguard offers the famous total
stock fund (VFINX). Very low expenses, good exposure to the
S&P 500. Of course you can get as creative as you like with
a couple of international and/or small-mid cap funds.

> 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?

Bad assumption. Read above.

> Thank you for your help in advance.

Your welcome. Not to downplay this group, but you have many
non-tax related questions/needs. I would repost this on
misc.invest.financial- plan also. You'll double the number
of responses in half the time and get great advice from BOTH
groups on different aspects of the situation.

<< ------------------------------------------------------- >>
<< 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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