Decision on ROTH IRA

[GimmeMyMoney]

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.

 

[LOL!]

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!]

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.

 

[GimmeMyMoney]

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.

 

[travelover]

.........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.

 

[myself]

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.

 

[Alan]

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.​

 

[travelover]

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

 

[Alan]

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.

 

[myself]

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 )

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.​