 |
|
|
|||||
| « Previous thread | Next thread » |
Hi,
I'm looking for a little advice on what I should do with money I have
in a 401A. I was working in a public agency position where my
retirement was put in a 401A and the funds were taxed by the state
government but not the federal government, so upon withdrawal the
federal government will want their share. There is only about 16,000
in the account, so I think if I flat out withdraw it I will get about
11,000. My new job offers a 401K and from what I understand the 401A
can't roll over into this, but it can a regular IRA. I would like to
start a Roth, but I think in order to do this I would need to withdraw
the money and be taxed on it and then start the Roth. I would like to
move it out of the 401A so I can actively contribute to it, but the
question is where to and how?
I would appreciate any insight.
Thanks!
--------------------------------------
Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
guidelines include a request for brevity and another for trimming posts to
which we respond. For all of the other tips and suggestions, see "FROM THE
MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the
Newsgroup.
z...@g...com wrote:
> Hi,
> I'm looking for a little advice on what I should do with money I have
> in a 401A. I was working in a public agency position where my
> retirement was put in a 401A and the funds were taxed by the state
> government but not the federal government, so upon withdrawal the
> federal government will want their share. There is only about 16,000
> in the account, so I think if I flat out withdraw it I will get about
> 11,000. My new job offers a 401K and from what I understand the 401A
> can't roll over into this, but it can a regular IRA. I would like to
> start a Roth, but I think in order to do this I would need to withdraw
> the money and be taxed on it and then start the Roth. I would like to
> move it out of the 401A so I can actively contribute to it, but the
> question is where to and how?
First - I'd be very careful tracking this - as you describe it, the
funds were taxed by the state, so on withdrawal, they shouldn't be taxed
again. Converting to a Roth at some point will help put an end to that
separate tracking. I'd suggest you look at
http://www.fairmark.com/refrence/index.htm
and understand the tax bracket you fall into. You should consider
rolling the funds to a regular IRA first, and then deciding when to
convert any/all funds to a Roth. My approach is to deposit or convert to
Roth in a relatively low bracket year or at retirement, and use pretax
deposits in the higher bracket years. I also strongly suggest never
converting the IRA to Roth in a year you can't afford to pay the tax out
of your pocket (i.e. not out of the IRA funds). The amount not converted
is subject to 10% penalty plus the tax.
Joe
www.blog.joetaxpayer.com
--------------------------------------
Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
guidelines include a request for brevity and another for trimming posts to
which we respond. For all of the other tips and suggestions, see "FROM THE
MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the
Newsgroup.
<z...@g...com> wrote
> I'm looking for a little advice on what I should do with
> money I have
> in a 401A.
To add to Joe's note: Starting on January 1 of 2008, one can
rollover directly one's qualified retirement plan to a Roth
IRA. But by going directly to a Roth IRA, the rollover
counts as income, and you will owe federal taxes on the
whole $16k, plus you may be bumped into the next tax
bracket. Going a little into the next tax bracket is barely
perceptible as a financial matter, but going a lot may
result in paying more taxes than necessary in the coming
years.
As Joe suggested, it's usually best to rollover to a
Traditional IRA (resulting in no Federal Taxes for the year
of the rollover), then do partial conversions of the
Traditional IRA to a Roth IRA such that you just graze the
top of the tax bracket in which you'd be without the partial
conversion.
I have used the free online tax calculators at dinkytown.com
to help compute the "optimal" amount to convert from my Trad
IRA to my Roth IRA each year. For 2008, see
http://dinkytown.com/java/Tax10402008.html . The "Income"
section has a place for "Taxable IRA distributions." This is
where you put any amount that is going to the Roth IRA from
either a Traditional IRA or your 401(a).
Here's a little more elaboration:
http://www.complianceheadquarters.com/ComplianceArti
cles/IRA_102307.aspx
--------------------------------------
Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
guidelines include a request for brevity and another for trimming posts to
which we respond. For all of the other tips and suggestions, see "FROM THE
MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the
Newsgroup.
Thanks so much for the information. I feel like I now have a decent
plan of action. I will most definitely check out the calculators so I
can attempt to get the money transferred over as soon as the tax man
will allow.
Thanks again!
--------------------------------------
Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
guidelines include a request for brevity and another for trimming posts to
which we respond. For all of the other tips and suggestions, see "FROM THE
MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the
Newsgroup.
On Apr 2, 11:31 am, "Elle" <h...@s...net> wrote:
> ...plus you may be bumped into the next tax
> bracket. Going a little into the next tax bracket is barely
> perceptible as a financial matter, but going a lot may
> result in paying more taxes than necessary in the coming
> years.
>
> do partial conversions of the
> Traditional IRA to a Roth IRA such that you just graze the
> top of the tax bracket
I have no doubt this is a completely ignorant question, so I will
apologize in advance. Where can I find the bracket amounts? How/
where can I see the brackets to determine what amount of income moves
me into the next higher bracket? Once I know the brackets, how do I
apply the logic? Do the brackets apply to Line 43 of the return
"Taxable Income"? Would this be the right place to look?
http://en.wikipedia.org/wiki/Tax_bracket#Tax_bracket
s_in_the_USA
--------------------------------------
Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
guidelines include a request for brevity and another for trimming posts to
which we respond. For all of the other tips and suggestions, see "FROM THE
MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the
Newsgroup.
"Heather" <H...@h...com> wrote
> How/
> where can I see the brackets to determine what amount of
> income moves
> me into the next higher bracket?
The Wikipedia site you gave appears accurate. The rates are
also (1) in the IRS 1040 instructions for any given tax
year; (2) at the IRS web site; just put in "tax rates"
without the quotation marks in the IRS search engine; (3)
available via googling for {"tax rates" 2008} E.g. this site
came up when I googled:
http://taxes.about.com/od/2008taxes/qt/2008_tax_rate
s.htm
> Once I know the brackets, how do I
> apply the logic? Do the brackets apply to Line 43 of the
> return
> "Taxable Income"?
Yes. I think the web site I give above explains the logic as
does the Wiki site you gave. For example, suppose your
taxable income was $33,000. Only $450 of this is taxed at
25%. The rest is taxed at 10% and 15%, per the table. That
calculator I gave before
(http://dinkytown.com/java/Tax10402008.html) is a good
second check on any estimates you do.
AFAIC, no stupid questions exist, as long as one makes a
reasonable effort to find the answer on his/her own, since
this effort is part of the overall learning process. blah
blah enough pedantry on pedantry. :-)
--------------------------------------
Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
guidelines include a request for brevity and another for trimming posts to
which we respond. For all of the other tips and suggestions, see "FROM THE
MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the
Newsgroup.
Heather wrote:
> I have no doubt this is a completely ignorant question, so I will
> apologize in advance. Where can I find the bracket amounts? How/
> where can I see the brackets to determine what amount of income moves
> me into the next higher bracket? Once I know the brackets, how do I
> apply the logic? Do the brackets apply to Line 43 of the return
> "Taxable Income"? Would this be the right place to look?
> http://en.wikipedia.org/wiki/Tax_bracket#Tax_bracket
s_in_the_USA
My favorite and the one I keep referencing here is:
http://www.fairmark.com/refrence/index.htm
It shows standard deduction, and exemptions, and charts brackets in a
way that appears most pleasant to me. I've never had anyone reply "Joe,
I like this site **** better.
Of course you can use TurboTax on line, and adjust your numbers up and
watch your tax change. That can work, but it seems quite the effort for
what you are trying to discover.
Joe
www.blog.joetaxpayer.com
--------------------------------------
Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
guidelines include a request for brevity and another for trimming posts to
which we respond. For all of the other tips and suggestions, see "FROM THE
MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the
Newsgroup.
Heather wrote:
> I have no doubt this is a completely ignorant question, so I will
> apologize in advance. Where can I find the bracket amounts? How/
> where can I see the brackets to determine what amount of income moves
> me into the next higher bracket? Once I know the brackets, how do I
> apply the logic? Do the brackets apply to Line 43 of the return
> "Taxable Income"?
No need to apologize for asking an ignorant tax question, the answer
isn't at all obvious. I just did one of these projections for a client
and every rate we came up with for "taxes on the next dollar earned" was
a strange hybrid rate that didn't match any of the tables. Especially
when adding in Social Security/self-employment taxes.
To address "what amount of income moves me into the next higher
bracket?" you need to know what type of additional income you're talking
about, and how much & what types of income you currently have.
Yes, line 43 on 2007 Form 1040 is your "taxable income" and that's the
figure used to calculate your tax bill. And if all your income (and any
additional income) is "ordinary income" such as salary/wages or taxable
interest, you can just look to those tables to see when you'll cross
into the next bracket, and do the same with your state income tax
bracket chart, and that answers the question for a lot of people.
There are many complicating factors though...just a couple examples:
If some of your income, or the additional income you'd tack on, would be
from long-term capital gains or qualified dividends, then a different
rate applies (0% initially, then 15%). If you paid AMT in 2007 (see line
45), then those bracket rates probably wouldn't apply for 2008. And if
you itemize your deductions or claim certain credits on your return, as
you increase your income you'll gradually lose some of those deductions
and credits, resulting in a different effective tax rate (if you lose a
deduction, line 43 gets bigger).
Which is to say, this isn't always an easy question to answer. As JoeT
suggested, you can put the income into TurboTax or something similar and
see what comes out, though that won't factor in tax-law changes from
year to year (including the bracket changes).
-Tad
--------------------------------------
Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
guidelines include a request for brevity and another for trimming posts to
which we respond. For all of the other tips and suggestions, see "FROM THE
MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the
Newsgroup.
On Mon, 21 Apr 2008 12:25:07 -0500, Tad Borek <b...@p...net>
wrote:
>Heather wrote:
>> I have no doubt this is a completely ignorant question, so I will
>> apologize in advance. Where can I find the bracket amounts? How/
>> where can I see the brackets to determine what amount of income moves
>> me into the next higher bracket? Once I know the brackets, how do I
>> apply the logic? Do the brackets apply to Line 43 of the return
>> "Taxable Income"?
>
>No need to apologize for asking an ignorant tax question, the answer
>isn't at all obvious. I just did one of these projections for a client
>and every rate we came up with for "taxes on the next dollar earned" was
>a strange hybrid rate that didn't match any of the tables. Especially
>when adding in Social Security/self-employment taxes.
>
Tad is exactly right that outcomes are not necessarily obvious. What
tax bracket I am in (or will be in) is not the same answer as what is
my marginal tax rate (on the next dollar) which is not the same answer
as how will my computed taxes be affected by any particular change to
my income. The only answer to the latter question, which is the only
real question in practice, is to calculate the new return exactly
considering all the effects on all the factors that go into a tax
calculation.
If one is attempting to forecast tax scenarios for future years this
requires the use of a tax model with future year rates, bracket
points, phase outs, and AMT rules written in.
--------------------------------------
Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
guidelines include a request for brevity and another for trimming posts to
which we respond. For all of the other tips and suggestions, see "FROM THE
MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the
Newsgroup.
"Tad Borek" <b...@p...net> wrote
> As JoeT suggested, you can put the income into TurboTax or
> something similar and see what comes out, though that
> won't factor in tax-law changes from year to year
> (including the bracket changes).
Not sure you're aware of this, but numerous online
calculators do have the 2008 tax brackets in them and also
reflect nuances of current tax law. E.g. the dinkytown one I
cited. Tax law for the current year could change, but it's
not likely to change much, if at all. Dinkytown has a
caution at the top of its calculator site about this.
You're right that, depending, self-employment income,
dividends etc. can affect the computation of the optimal
amount to convert in any given year. Using a good tax
estimator such as the free dinkytown one, along with
understanding the basics of tax law so entries may be made
correctly at such estimators, is the best bet. Remember that
conversions must be completed by December 31, so an estimate
is necessary if one is aiming to minimize the tax effects of
the conversion.
In the alternate, one can "simply" convert somewhat more
than they think is optimal, then recharacterize by Apr. 15.
Though personally, I have found recharacterizations
annoying. An ounce of prevention is worth a pound of cure.
--------------------------------------
Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
guidelines include a request for brevity and another for trimming posts to
which we respond. For all of the other tips and suggestions, see "FROM THE
MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the
Newsgroup.
| « Previous thread | Next thread » |
Short-term Fund purchasing advice...
Financial Guru: Buy-and-Hold a Thing of the Past
Another suicide due to financial crisis.
Does a person have only one asset allocation?
Recommended allocation of $500k for three year time horizon is?
Preferred income funds...safe or just gift wrapped junk bonds?
Up