In my 401(k), I have a fair chunk of after-tax contributions. That
money is eligible for rollover to an IRA. In such a rollover, a share
of earnings comes with it. From talking to the plan reps, it looks like
it's about half each, that is rolling over $10k of after-tax
contributions would bring about that much in taxable earning along.
My reason for wanting to do this is that my tax-advantaged space
outside the 401(k) is limited, and there are some things I'd like for
my AA that either aren't available or don't have good choices in the
plan.
When I do that, is it best to plan for an immediate Roth conversion? My
marginal rate was 25% last year, with a state tax of 6%. I am under the
income limits for Roths, and in fact that's all I have as far as IRAs
(not all that far).
It's unclear to me yet whether my plan allows the new (as of 2008)
rollover directly to a Roth. Someone on one of the forums said that if
a rollover is possible at all from the plan (it is) then a Roth would
be possible without anything special from my plan administration.
At any rate the two-step rollover to TIRA then Roth conversion process
would still be possible. If I'm going to convert to Roth, it seems
easier to pick an amount that I would be able to do all at once, to
avoid repeated filing of IRS form 8606, plus I'd want to avoid bumping
myself up in tax brackets.
Are there any convenient online tools that will assess the impact of a
Roth conversion on tax bracket given a guesstimate of the taxable
income without the conversion?
If I don't convert now to a Roth, then (as I understand it) I have to
file form 8606 next year and then whenever distributions are taken in
the future.
Another suggestion from the forum was to roll to a TIRA, then roll back
to the 401(k). If I read IRS Pub 590, correctly, then only the taxable
money would roll back into the plan.
<http://www.irs.gov/publications/p590/ch01.html#d0e3542>
That would give a TIRA with nothing but non-taxable funds, so an
immediate Roth conversion would be no tax impact. I, as I understand
it, would be able to roll back out the taxable funds from the 401(k) as
I wished, so I could do some later and pay the taxes for a Roth if
desired.
Brian
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