Author Topic: 401k --> IRA Strategies  (Read 1775 times)

lostmonkey007

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401k --> IRA Strategies
« on: January 14, 2017, 03:50:13 PM »
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« Last Edit: February 16, 2018, 09:55:39 AM by lostmonkey007 »

seattlecyclone

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Re: 401k --> IRA Strategies
« Reply #1 on: January 14, 2017, 06:03:25 PM »
1) I can pull out the ENTIRE Roth IRA (which I had rolled from the Roth 401k) after 5 tax years with no tax / penalty implications

Not quite. Whatever amount you originally contributed to the Roth 401(k) counts the same as Roth IRA contributions when you roll it over. This amount can be withdrawn at any time with no tax or penalty due. Any subsequent growth either in the Roth 401(k) or Roth IRA is generally taxed at your marginal rate plus 10% if withdrawn prior to age 59.

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2) I will also have flexibility to convert portions of the Traditional IRA (which is just my rolled over pre-tax 401k money) into a Roth IRA, keeping in mind effective tax exposure (i.e. staying within certain tax bracket thresholds) --> And whatever funds I convert into the Roth IRA in a given year, those funds will similarly become available after 5 tax years with no tax / penalty implications

Yes.

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I guess a fundamental question here... When you roll over a 401k balance into IRAs, is the entire initial balance that you transfer (so let's say I rollover $500K in 401k funds) considered a "contribution" (so that entire initial $500K). I ask because that 401k balance reflects 6 sources of money:

No, it's all a rollover. It doesn't eat into your IRA contribution limit at all.

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1) My pre-tax contribution from my paycheck
2) Earnings on pre-tax contribution
3) My Roth contribution from my paycheck
4) Earnings on the Roth contributions
5) Company match
6) Earnings on company match

Items 1, 2, 5, and 6 are all pre-tax funds. There's no real difference whether this pre-tax money is a "contribution" or "earnings" or anything. It's all taxed at your marginal rate if you withdraw it or convert it to Roth, and there's a 10% early withdrawal tax that generally applies for a direct withdrawal prior to 59.

Item 3 will count as a "contribution" for the purpose of the Roth IRA ordering rules, and Item 4 will count as "earnings."

seattlecyclone

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Re: 401k --> IRA Strategies
« Reply #2 on: January 15, 2017, 11:40:24 AM »
After you leave the job with the Roth 401(k), you can withdraw whatever you want, whenever you want.

When the money is still in the 401(k), withdrawals are pro-rated between contributions and earnings. In Year 3 for example, your Roth 401(k) is 90% contributions and 10% earnings, so 90 of any dollar you withdraw will be tax-free and the remaining 10 would be taxed at your current marginal rate plus the 10% early withdrawal tax.

From Year 4 onward, the Roth IRA ordering rules apply. This means the first $18k you withdraw anytime after the rollover would be tax-free. Beyond that you'll owe tax at your current marginal rate plus 10% for any withdrawals until you're old enough to make qualified distributions.

seattlecyclone

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Re: 401k --> IRA Strategies
« Reply #3 on: January 15, 2017, 09:20:28 PM »
Yep, I think you've basically got it.

One small clarification is that in the Roth IRA there's a "conversions" bucket in addition to "contributions" and "earnings." The money you move from traditional to Roth will go into this "conversions" bucket, not "contributions."

The withdrawal ordering is:
1) Contributions
2) Conversions (oldest first)
3) Earnings

Contributions are always completely tax-free to withdraw, conversions are tax-free after five years, and you generally have to wait until age 59 to take out the earnings tax-free.