Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Convert 401k funds to a non-taxed IRA?
Old 08-21-2011, 12:47 PM   #1
Recycles dryer sheets
 
Join Date: Feb 2010
Posts: 396
Convert 401k funds to a non-taxed IRA?

Hello:

I was half-listening to a financial talk show on AM radio in the care the other day. If I heard the host correctly, he indicated that there is a way to convert accrued money from a tax deferred 401K account into a non-taxed IRA account at retirement. I had never heard of such a product or process whereby one could achieve this result, from having to pay taxes on 401k distributions to not having to pay taxes on IRA based distributions. Is anyone familiar with this? If so, can you describe how it works?

The only thing I could find that was remotely close to this was the conversion of 401k funds to a single premium fixed annuity, but I believe in that scenario you are still paying taxes on the annuity payments received. Thank you for your advice.
__________________

__________________
nico08 is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 08-21-2011, 01:05 PM   #2
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2005
Posts: 5,414
you cant escape the taxes.. you can just do a conversion and pay the taxes...

whether you want to requires alot of number crunching.
__________________

__________________
mathjak107 is offline   Reply With Quote
Old 08-21-2011, 01:11 PM   #3
Recycles dryer sheets
 
Join Date: Feb 2010
Posts: 396
So the choice is basically whether to pay a big tax big on the conversion from the 401k to an IRA account up front, or to pay taxes on the 401k distribution amount on an annual basis? I am assuming that if you convert from the 401k account to an IRA and pay a lump sum of taxes up front, then when you take any distribution on the IRA later, you are not paying taxes on the IRA distribution again, correct? What would be the motivation to pay a large tax bill early by converting the 401k assets to an IRA account?
__________________
nico08 is offline   Reply With Quote
Old 08-21-2011, 01:42 PM   #4
Moderator
Alan's Avatar
 
Join Date: Jul 2005
Location: Eee Bah Gum
Posts: 21,132
Quote:
Originally Posted by midnighter777 View Post
So the choice is basically whether to pay a big tax big on the conversion from the 401k to an IRA account up front, or to pay taxes on the 401k distribution amount on an annual basis? I am assuming that if you convert from the 401k account to an IRA and pay the lump sum of taxes up front, then when you take any distribution on the IRA later, you are paying taxes on the IRA distribution again, correct? What would be the motivation to pay a large tax bill early by converting the 401k assets to an IRA account?
What I did was a direct rollover to an IRA. No taxes paid, new IRA has same tax deferred status as the 401k. I then converted ~$20k of it to a ROTH IRA and paid the taxes on the $20k. Each year I will convert some of the rollover to the ROTH, to do bit of tax diversificationand reduce eventual RMD's at 70.
__________________
Retired in Jan, 2010 at 55, moved to England in May 2016
Now it's adventure before dementia
Alan is offline   Reply With Quote
Old 08-21-2011, 02:07 PM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2005
Posts: 5,414
thats most likely what they misunderstood to be tax free... its only moving the 401k into a tax defered account.
__________________
mathjak107 is offline   Reply With Quote
Old 08-21-2011, 02:11 PM   #6
Recycles dryer sheets
Aeowyn's Avatar
 
Join Date: Jan 2011
Location: Scotts Hill, TN
Posts: 105
You can roll a 401k to either a Traditional IRA or a Roth IRA.

If you roll to a Traditional IRA, no tax due when you roll, but taxed as you take it out just like your Traditional 401k.

If you roll to Roth IRA, you pay tax on the amount rolled, but from then on the money grows tax free instead of tax deferred.

There are some other Roth advantages such as no RMDs and if you wait 5 years after you convert, you can take contributions and conversions (not growth) before 60 with no tax/penalty.

The main reason you want to roll to IRA (which ever one works for you), is to have more control over the investments. Many 401ks have limited invstment options and many have high fees that may be hidden.

There are some 401ks that have lower fees than what you can get as an individual. If you are happy with your cuurent investments, you could leave there.

I plan to roll my 401k to Traditional IRA and then do partial coversions to Roth during low income years to max out 15% tax bracket (based on current tax system)
__________________
Quit my J.O.B to become a farmer/rancher - December 2011
Now working part time from home on contract to support prior employer.
Aeowyn is offline   Reply With Quote
Old 08-21-2011, 02:15 PM   #7
Thinks s/he gets paid by the post
DblDoc's Avatar
 
Join Date: Aug 2007
Posts: 1,224
Quote:
Originally Posted by Alan View Post
What I did was a direct rollover to an IRA. No taxes paid, new IRA has same tax deferred status as the 401k. I then converted ~$20k of it to a ROTH IRA and paid the taxes on the $20k. Each year I will convert some of the rollover to the ROTH, to do bit of tax diversificationand reduce eventual RMD's at 70.
I plan a similar strategy when I FIRE. Maximize tax strategies and minimize RMD's later.

DD
__________________
At 54% of FIRE target
DblDoc is offline   Reply With Quote
Old 08-21-2011, 02:20 PM   #8
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2005
Posts: 5,414
they totaly blew my plan out of the water last december when they did away with paying back ss later on .

my plan was to pay ss back ,get the whopper of a higher payment for my spouse and i and take all that nice negative income it leaves us with for a nice free roth conversion.

yep, un-known to most was the fact that when you payed ss back you could take either a tax credit for what you paid or an income deduction.

typically an amount like that would leave most with a negative income and nothing to do with it so it dies on the vine.

well if you waited until then to do a roth conversion your flying those empty seats and got it for free.

oh well its a dead loop hole now.
__________________

__________________
mathjak107 is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Roth Conversion from 401k while still working? why1942 FIRE and Money 5 08-03-2011 05:18 AM
Money Market funds in potential danger. clifp FIRE and Money 22 07-06-2011 07:10 AM

 

 
All times are GMT -6. The time now is 09:01 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.