Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Decision on ROTH IRA
Old 11-12-2010, 04:21 PM   #1
Confused about dryer sheets
 
Join Date: Nov 2010
Posts: 2
Decision on ROTH IRA

Ok I just cashed out an old 401k from my previous job.....I know cashing out isn't the best thing to do but I had to for various reasons.

However, I have $3,000 left from the cash out and I want to invest that money in a ROTH IRA.

Is it smart to invest in a ROTH IRA at this time? And if I do.....will I receive a tax break for this year when I go to file taxes for 2010? The reason why I'm asking if I receive a tax break is because I know the government will automatically tax me 10% of the amount that I withdrew.

Thanks for the advice. This is my first post and I'm very serious about planning for retirement (I'm 25 yrs old) & getting into the stock market so I will look forward to my many conversations with you all.

Thanks again.
__________________

__________________
GimmeMyMoney 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 11-12-2010, 04:30 PM   #2
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jun 2005
Posts: 8,616
No tax break on a Roth contribution. You need earned income to make a Roth contribution as well.

The 10% you pay on the 401(k) cash out is the penalty and not the taxes. You still have the taxes to pay on that cash out (plus the 10% penalty).

I think it is always smart to contribute to a Roth IRA if eligible. Then decide what to invest in within the Roth IRA. Remember: the Roth IRA is just a bucket to hold your investment and/or money. You decide what that bucket of money buys or is invested in.
__________________

__________________
LOL! is offline   Reply With Quote
Old 11-12-2010, 04:31 PM   #3
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jun 2005
Posts: 8,616
If it has not been 60 days since you cashed out, you should consider taking the $3000 and contributing it to a rollover IRA. Then you will not pay the 10% penalty ($300 on the $3000) and you will not have to pay income taxes on the $3000 now.
__________________
LOL! is offline   Reply With Quote
Old 11-12-2010, 04:51 PM   #4
Confused about dryer sheets
 
Join Date: Nov 2010
Posts: 2
Quote:
Originally Posted by LOL! View Post
If it has not been 60 days since you cashed out, you should consider taking the $3000 and contributing it to a rollover IRA. Then you will not pay the 10% penalty ($300 on the $3000) and you will not have to pay income taxes on the $3000 now.
I actually cashed the 401k out about 4 months ago and the 3k has been sitting in my bank account until I figure out what I want to do with it. The 401k was with fidelity and when you cash-out early they take 20% out automatically & then I'll incur a 10% penalty when I file my taxes so I'll have to pay that as well.

I was hoping I'd receive some sort of tax break and get back some of that 10% penalty but I guess I'll have to live with it.

I will just invest the 3k into a ROTH IRA and use that as a tool for retirement. Plus I'm not a homeowner and I know if I withdraw the money for a first time home purchase within 5 years I won't be penalized.

Thanks for the advice I really appreciate it. I look forward to more great advice.
__________________
GimmeMyMoney is offline   Reply With Quote
Old 11-12-2010, 05:47 PM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
travelover's Avatar
 
Join Date: Mar 2007
Posts: 9,874
Quote:
Originally Posted by LOL! View Post
.........You need earned income to make a Roth contribution as well..............
I think this is true unless you are married and spouse has enough earned income to cover both of your contributions.
__________________
Yes, I have achieved work / life balance.
travelover is online now   Reply With Quote
Old 12-08-2010, 03:23 PM   #6
Recycles dryer sheets
 
Join Date: Jan 2008
Posts: 314
Quote:
Originally Posted by GimmeMyMoney View Post
Ok I just cashed out an old 401k from my previous job.....I know cashing out isn't the best thing to do but I had to for various reasons.

However, I have $3,000 left from the cash out and I want to invest that money in a ROTH IRA.

Is it smart to invest in a ROTH IRA at this time? And if I do.....will I receive a tax break for this year when I go to file taxes for 2010? The reason why I'm asking if I receive a tax break is because I know the government will automatically tax me 10% of the amount that I withdrew.

Thanks for the advice. This is my first post and I'm very serious about planning for retirement (I'm 25 yrs old) & getting into the stock market so I will look forward to my many conversations with you all.

Thanks again.
Well, you can leave it in a Roth IRA, and add it to your taxable income over 2 tax filing years (2010 Roth IRA Conversions).
The other nice thing is that income limits don't apply this year (even if your income is over $100k).

You'll still pay the penalty, but it's 10% on half that conversion this tax filing year (20100), and half the next tax filing year (2012).

As for getting a tax deduction, that isn't going to happen, since Roth is always after tax now. You just don't pay tax on it when you retire. But keep detailed transaction records of deposits made, etc.

I recently converted a former company 401K into Traditional IRA. I have to examine the tax ramifications for my wife and I.
__________________
Primary title "chief moron"
myself is offline   Reply With Quote
Old 12-08-2010, 03:40 PM   #7
Moderator
Alan's Avatar
 
Join Date: Jul 2005
Location: Eee Bah Gum
Posts: 21,085
Quote:
Originally Posted by myself View Post
The other nice thing is that income limits don't apply this year (even if your income is over $100k).
Just to be clear. Income limits don't apply for an IRA conversion to a Roth. To make a contribution to a Roth, the income levels are still in effect.

The Roth IRA income limits for 2010 are $177,000 for married filing joint taxpayers, and $120,000 for single taxpayers. However, contributions to a Roth IRA are phased-out at lower income levels.
__________________
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 12-08-2010, 03:52 PM   #8
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
travelover's Avatar
 
Join Date: Mar 2007
Posts: 9,874
Quote:
Originally Posted by Alan View Post
Just to be clear. Income limits don't apply for an IRA conversion to a Roth. To make a contribution to a Roth, the income levels are still in effect.

The Roth IRA income limits for 2010 are $177,000 for married filing joint taxpayers, and $120,000 for single taxpayers. However, contributions to a Roth IRA are phased-out at lower income levels.
But you can do a regular nondeductible IRA and immediately roll it to a Roth
__________________
Yes, I have achieved work / life balance.
travelover is online now   Reply With Quote
Old 12-08-2010, 04:11 PM   #9
Moderator
Alan's Avatar
 
Join Date: Jul 2005
Location: Eee Bah Gum
Posts: 21,085
Quote:
Originally Posted by travelover View Post
But you can do a regular nondeductible IRA and immediately roll it to a Roth
Absolutely - you just need to be sure what you are doing to save a bit of aggravation.

confession
This year I messed up and did a Roth conversion from my IRA, and then later a contribution to that Roth as I didn't expect to exceed the income limits and later had to go through the aggro of re-characterization of the Roth contribution to tIRA.
__________________
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 12-10-2010, 05:55 PM   #10
Recycles dryer sheets
 
Join Date: Jan 2008
Posts: 314
I stand corrected. You can convert from a traditional IRA into a Roth IRA without income limitations. However, income limitations still apply if you are simply making normal contributions to the Roth IRA.

( in case anyone wants it, here's a link: 2010 IRA Contribution Limits )

Quote:
Originally Posted by Alan View Post
Just to be clear. Income limits don't apply for an IRA conversion to a Roth. To make a contribution to a Roth, the income levels are still in effect.


The Roth IRA income limits for 2010 are $177,000 for married filing joint taxpayers, and $120,000 for single taxpayers. However, contributions to a Roth IRA are phased-out at lower income levels.
__________________

__________________
Primary title "chief moron"
myself 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
2011 and 2012 tax planning... Roth IRA and Roth 401k jIMOh FIRE and Money 6 05-02-2010 11:20 AM
converting IRA to Roth IRA based on new Roth Rules vs. 72t mbmmccoy FIRE and Money 27 09-28-2009 07:27 AM
Questions about limits surrounding ROTH IRA, SEP IRA and ROTH 401k RockSplat FIRE and Money 14 06-08-2009 01:30 PM
Can I put money in both a Roth 403(b) and regular Roth IRA? lhamo FIRE and Money 3 07-14-2008 12:42 PM
Can I max out my Roth IRA, Trad. IRA, and SIMPLE IRA? thefed FIRE and Money 9 09-24-2007 05:52 PM

 

 
All times are GMT -6. The time now is 05:43 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.