Author Topic: Rolling an old 401k into a self-directed ROTH IRA: Tax implications huge...  (Read 3663 times)

Money Stoic

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Ok investment scientists, let's optimize this one:

Quit job to start own business.  Purchased health insurance through the exchange.  Price is based directly on projected income for the year.  Who knows what that will be? 

Have old 401k and decided to roll it into a self directed ROTH IRA and pay the taxes on it this year.

Any idea if this will be taxed as earned income (need to know due to ACA Federal Health Insurance Exchange)?

If I "earn" more than $48,000 + this year, I will have to repay premium credits at tax time.  IF the 401k roll over counts as earned income, this will change things dramatically?

Anyone know the answer to this?

Should I roll over into something else?  Non-Roth?  Self Directed Roth 401k?  Any tax magic I need to preform?

geekette

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A rollover into a traditional IRA would not increase your MAGI.  A rollover into a Roth would.

Details here.

Money Stoic

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A rollover into a traditional IRA would not increase your MAGI.  A rollover into a Roth would.

Details here.

Thank you for finding that document.

I assume you are picking up on:

"Taxable amount of pension, annuity or IRA
distributions and Social Security benefits"

The issue here is I am not taking a true distribution.  I will owe taxes on the roll-over, but I have seen interpretations both ways that it would not fall under gross income (rather taxed as a separate event outside of the realm of income).

geekette

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I wouldn't chance it unless you have info from a trusted site.  There's very little that I can find about ACA rules, and what I see is rather general (more toward the average person with W-2 income).

What I see from an older investopedia article states:
Quote
Any funds converted into a Roth IRA that would otherwise be taxable must be included as income for the year of the conversion.

geekette

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And from the IRS (item 7)
Quote
Modified adjusted gross income is the adjusted gross income on your federal income tax return plus any excluded foreign income, nontaxable Social Security benefits (including tier 1 railroad retirement benefits), and tax-exempt interest received or accrued during the taxable year. It does not include Supplemental Security Income (SSI).

MDM

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I have seen interpretations both ways that it would not fall under gross income (rather taxed as a separate event outside of the realm of income).
Do you have links to those interpretations?

Wile E. Coyote

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A rollover into a traditional IRA would not increase your MAGI.  A rollover into a Roth would.

Details here.

Thank you for finding that document.

I assume you are picking up on:

"Taxable amount of pension, annuity or IRA
distributions and Social Security benefits"

The issue here is I am not taking a true distribution.  I will owe taxes on the roll-over, but I have seen interpretations both ways that it would not fall under gross income (rather taxed as a separate event outside of the realm of income).

I don't have a link to specific IRS guidance on this, but a quick google of"roth conversion magi aca" shows that the consensus seems to be that Roth conversions are included in MAGI.  I can think of no reason why they would be treated differently.

Wile E. Coyote

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I did a bit more digging, and I am fairly confident that the conversion will be included in MAGI for ACA purposes.  The definition of MAGI for ACA is in IRC section 36B(d)(2)(B), which simply refers to the general definition of AGI with certain additions. The general definition of AGI is in IRC section 62 which refers to the definition of gross income in IRC section 61, which will include Roth conversion income under IRC section 408A(d)(3).

Note that Congress specifically excluded Roth conversion income from the definition of AGI  in calculating the AGI limit for eligibility for Roth contributions in IRC section 408A(c)(3)(B).   No similar exclusion appears to apply here.
« Last Edit: July 04, 2014, 09:57:04 PM by Wile E. Coyote »

Money Stoic

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I have seen interpretations both ways that it would not fall under gross income (rather taxed as a separate event outside of the realm of income).
Do you have links to those interpretations?

Still trying to find a link.  I went to a seminar about self directed Roth conversions from an old 401k that touched on this...but my enrolled agent (who I fired for being wrong alot) is the main person who said it would be taxed on at its own rate (would not bump other income into a higher rate) and because of this, he thought it would not count toward ordinary income for ACA purposes (so, in other words, he didn't know).

matchewed

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Yes a conversion affects your MAGI. See this discussion where at post #16 the conversation regarding conversions occurs.