IRA Rules

Posts Tagged ‘roth ira’

Question: Roth conversion – good option or not?

Hi,
Here is my situation: I’ll be out of US for next 8+ years (may be more) on overseas assignment with family. I have 401K but don’t have Roth IRA.

Can I convert my 401K to Roth IRA based on 2010 Roth conversion rules and save on early withdrawal penalty?

I’m thinking to convert my 401K to Roth IRA and withdraw after 5 yrs (just contributions) to avoid penalty or any tax.

Is this good option? OR is there any way to avoid / reduce my early withdrawal penalty? I might retire outside of US.

Thanks in Advance,

LV

Answer: Depending upon the amount, one decision you have to make for any amount converted in 2010 is whether to pay tax on the conversion in 2010 or whether to pay the tax in 2011 and 2012 (that is a special deal for 2010 only).

Or if the amount is high, you may want to transfer it to an IRA and convert it over a period of years to reduce the percentage of tax. But each conversion has to season for 5 years before you can withdraw that portion without 10% penalty.

Charles Schwab Roth IRA Conversion Q&A: What Are the Major Benefits of Converting to a Roth?

Question: Early withdrawal from IRA used for a first-time home purchase, I need some guidance?

I took out some money from an IRA in 2006. I used it to purchase a home. However, the home is actually not in the United States. However, my name is on the title and some family members are living in the home currently. It is my first home. I am wondering, is this a qualified home purchase for an early withdrawal of an IRA, so that I don’t have to pay the penalties? It was a Roth IRA, so in theory, I should not have to pay anything on this to the IRS.

Now the IRS is writing me telling me that I owe a bunch of money.

I hope someone can help me. All of the guidance that I found online seemed very vague as to what kind of a home purchase qualifies for the early withdrawal.

Answer: When you took out your money in 2006, you needed to report that on your tax return. You received a 1099R for the distribution. It was probably coded for an early distribution of a Roth IRA.

The IRS does not know how much of that distribution is the return of you contribution, or if you have an exception to the penalty. Hence, the big tax bill.

In order to figure the penalty on the distribution, or to document that no penalty applies, you need to fill out Form 5329. If you purchased a first home that was the main home of yourself, spouse, child, grandchild, parent, or other ancestor, you may escape the 10% penalty on $10,000 of the distribution.

If you did not follow the above procedure, you need to seek a professional tax preparer who can do an amendment for you.

If you do not qualify to escape the 10% penalty, then you will owe a penalty on the distribution that represents earnings of the Roth IRA. Again, Form 5329 is required to figure the correct tax.

Page 55 of the following publication explicitly defines what is a qualifying home purchase. There is no requirement that the home be in the United States.

http://www.irs.gov/pub/irs-pdf/p590.pdf

Question: Should I contribute more to a PRE-TAX invest. acct like 401K or into a POST-TAX invest. acct like Roth IRA?

The fees for my POST-TAX(income tax) Roth IRA is only $12 a month for 6 free investments and I have wide range of ETFs and stocks to choose from. I can take money out but with some penalities and or none at all based on the rules. I anticipate making a huge withdrawal to pay for a house.

The fee for my PRE-TAX(income tax) is .50 for every $1K but I have a small range of funds that I can invest in. I can’t take the money out of this account until i retire. There are certain rules that allow me to take the money out for things such as purchasing a house, but I would have to pay that money back. So it’s like taking a loan out on my own money.

What would be more beneficial for me?

Answer: You may want to rethink the idea of taking anything out of a 401(k) because if you leave the job, the money needs to be back there ASAP–there are penalties, etc. associated with that.

As for a Roth IRA, I prefer maxing out IRAs whenever possible because you have more choices and freedom with an IRA than a 401(k). IF your employer offers something in matching for a 401(k) it’s probably worth contributing to max out what he’ll put in as it’s effectively free money.

I think you need to read this, though, as if I’m following you, I think you may believe you can pull money from either kind of account for a house without worries–there are conditions in both cases:

http://www.kiplinger.com/columns/starting/archive/2006/st0309.htm

Good luck!

Slagle Financial – Roth IRA Conversions, New Tax Policies