Ask The Money Coach

Posts Tagged ‘Roth conversion’

Q: I’m 57 Years Old With Serious Arthritis. I Work With Severely Emotionally Disturbed Boys. I am Considering Resigning from This Position, Taking Money Out of my 401(k) Plan and Rolling it Over, Minus a Small Deduction for my Use and to Pay Off Debt. First I will Apply to Work in Education as a Teacher Assistant Making Less Money But Not As Difficult As My Current Job. I Have No Savings and am Struggling. What Should I Do?

A: Well, only you know whether or not it’s time for a major career shift. But based on what you said, you seem to be a bit overwhelmed in dealing with such an emotionally demanding job. You said you’ve worked there since 1997 and have been in the special education field since 1990, so the good news is that it’s not too much of a stretch to take the skills and experiences you’ve amassed over 20 years and apply them in the general education arena. From a financial standpoint, however, since you have no savings and described yourself as struggling to make ends meet, I would advise you to be cautious about taking money out of your 401(k) plan. You said you planned to roll it over. But into what? Your message didn’t indicate specifics. Into an IRA or something else? Read this post about Roth IRAs and this one as well about the benefits of having a 401(k).

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Q: I Have Never Qualified for a Tax Deductible IRA Due to High Income and 401(k) Access Through Employers. Neither Have I Qualified for the Roth. I Understand Beginning This Year There is No Income Limit on a Roth Conversion. Am I Correct in Thinking I Can Open a Couple of Non-Deductible IRAs (One For ’09 and One For ’10) and Then Convert All the Money to a Roth? No Restrictions on Income, No Taxes Due Since the IRA Would Be Non-Deductible to Begin With, No Penalties? It Sounds Too Good to Be True. Am I Missing Something?

A: You are correct in your assumptions. Yes, you can open two IRAs (one for 2009 and one for 2010), and safely convert them into a Roth this year because of the removal of the income limits on Roth conversions. I double-checked with an expert on this, David Mendels, who is a Certified Financial Planner and the President-Elect of the New York Chapter of the Financial Planning Association. David is also an adjust faculty member at New York University, as well as the head of the fee-based financial planning firm, Creative Financial Concepts, LLC. So he is very well-credentialed and I’m confident in his knowledge ane expertise. He told me to offer you two caveats, just to make sure your efforts go smoothly.

First, if you have any existing IRAs that are traditional IRAs or IRAs other than the new ones you plan to open, be aware that your basis will be calculated over the combined IRAs that you have, not just the ones you are opening now. Second, to make sure you don’t experience any future issues if any questions ever arise, keep very clean records about this for the future. Here’s how: wait a brief period after you open the non-deductible IRA before you do the conversion. David suggested that you wait a week or so – or as long as it takes until the IRA custodian has a record that your original contribution was a non-deductible IRA. After that’s done and you have written confirmation, then go ahead and do the conversion.

A final tip: you can open two IRAs if you want, but you certainly don’t have to. If you prefer to keep things simpler (again, from a paperwork and record-keeping standpoint), you can just open a single non-deductible IRA. Put in your contribution for 2009 — you have to do it by April 15, 2010 — and make sure that the contribution is specifically designated for 2009. Then you can make another, separate contribution that is specifically earmarked as a 2010 contribution. Either way (one or two IRAs) accomplishes your goal and allows you to ultimately convert two years’ worth of IRA contributions into a Roth. Good luck!

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