"Mark Freeland" <BnetOnewsX[at]sbcglobal.net> writes:

- quote -

And they had to fix it because people realized it was a way
to get a penalty-free early withdrawal from a trad IRA -- do
a Roth conversion and then immediately withdraw it from the
Roth. Presto -- no 10% early-withdrawal penalty. Once this
little trick appeared in the WSJ, Congress had no choice but
to plug the hole.

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

"Ernie Klein" <ecklein[at]pacbell.net> wrote in message
news:ecklein-EB607F.16133430032007[at]news.newsguy.com...

- quote -

Okay, go back to the ultimate source. Where does the 10% penalty come from?
Section 72 of the IRC. More specifically, the oft-cited 26 USC 72(t).
Section 72(t)(1) gives the clear statement:

"If any tapayer receives [an IRA or pension distribution] the taxpayer's tax
... in which such amount is received shall be increased by an amount equal
to 10 percent of the portion of such amount which is INCLUDIBLE IN GROSS
INCOME." (That is, taxable.)
http://caselaw.lp.findlaw.com/caseco...ection_72.html

So, you may be wondering, then why is a distribution from a conversion in
under 5 years subject to a 10% tax? Fair question. Originally it wasn't.
Congress fixed this later. That's why the conversion rules are so
convoluted and appear grafted on after the fact.

That's why you have Section 408A(d)(3)(F): "Special rule for applying
section 72

"(i) In general. If - (I) any portion of a distribution from a Roth IRA is
properly allocable to a qualified rollover contribution described in this
paragraph [i.e. Roth conversions]; and (II) such distribution is made within
[5 years of conversion], then section 72(t) shall be applied as if such
portion were INCLUDIBLE IN GROSS INCOME."
http://caselaw.lp.findlaw.com/caseco...tion_408a.html

So there you have it - the general rule is: distribution not taxed, then no
penalty (Section 72). But sub-5 year conversion withdrawals are subject to
Section 72(t) 10% penalty as if they were taxed.

Mark Freeland
BnetOnewsX[at]sbcglobal.net

In article <1175255645.399651.95970[at]p77g2000hsh.googlegroups.com> ,
"woessner[at]gmail.com" <woessner[at]gmail.com> wrote:

- quote -


I keep asking for someone to point me to an IRS publication or
instruction that says that but all I get is pointers to non-IRS web
sites that say that. I can find nothing on the IRS FAC's, Topic
letters or PUB's that say anything about the penalty only applying to
earnings.

The IRS says: "To discourage the use of pension funds for purposes other
than normal retirement, the law imposes an additional 10% tax on
certain early distributions of these funds. Early distributions are
those you receive from a qualified retirement plan or deferred annuity
contract before reaching age 59 1/2. "

I have always believed that this is to prevent you from removing a
contribution prior to retirement age once it had been made.

They DO say that you are not TAXED on removing contributions that you
have already paid tax on but it seems clear in PUB 590 that you are
subject to the 10% penalty on any non-qualified distribution (and being
under 59 1/2 makes it unqualified except for certain exceptions which
don't apply here). The way I read it the 5 year rule for conversions is
an ADDITIONAL hurdle you have to jump over, it doesn't eliminate the
other requirements.

The only place that the 5-year period on conversions is mentioned at all
is on page 64 or chapter 2 of PUB 590 and it only says what happens if a
distribution is taken BEFORE the 5-year period is over. It says NOTHING
at all about treating the distribution from a conversion any different
AFTER the 5 years has passed than any other distribution unless I am
really missing something.

I realize the the PUB's are not always perfect and the actual code (law)
may say otherwise, but I would think that if that is the case that there
would be something about it somewhere on the IRS site since this seems
rather basic.

--
-Ernie-

On Mar 30, 5:01 am, Ernie Klein <eckl...[at]pacbell.net> wrote:
- quote -

I don't believe this is correct. The 59.5 age rule only applies to
earnings. So if you're only withdrawing contributions or conversions
(after the 5-year rule), the 59.5 age rule does not apply.
After all, you've already paid taxes on contributions and conversions.

--Bill

In article <y9qdnRdyR64RrZHbnZ2dnUVZ_vOlnZ2d[at]comcast.com> ,
joetaxpayer <joetaxpayer[at]nospam.com> wrote:

- quote -

PUB 590 says that there is a separate 5 year period for *each*
conversion. Also, you still have to be over 59 1/2 to avoid the
penalty.

--
-Ernie-

On Mar 29, 5:33 pm, joetaxpayer <joetaxpa...[at]nospam.com> wrote:
- quote -

Yes, that should be fine.

Also note that the five year rule isn't EXACTLY a five year rule. For
example, if you did a Roth conversion on 12/31/2000, you can withdraw
the money on 1/1/2005. In fact, in the case of Roth contributions,
the "five-year" period can actually be less than 4 years. Suppose you
made a CY '98 Roth contribution on 4/15/99. Your "five-year" period
is then up on 1/1/03.

Fool.com has a good article about this:

http://www.fool.com/money/allaboutiras/allaboutiras.htm

Discussion of the "five-year" rule is under "Roth III: Distributions"
and early withdrawals are covered in "Roth IV: Early W/Ds".

--Bill

woessner[at]gmail.com wrote:
- quote -

Your post was short and sweet, I left it intact, as my question is brief;
Does (2) provide an exception to 72(t)?

I manage the money of a 48 year old who isn't working. Each year I've
converted enough IRA to Roth to stay in the zero bracket. In two years
she will have depleted her post-tax money, and would have to draw from
either the Roth or regular IRA. (2) tells me she can withdraw any Roth
that's aged 5 years, tax free, and continue to shift from IRA, i.e. a
conversion from IRA, but a withdrawal of old Roth money. This would let
us avoid any 72(t) calculations. Do you see an issue with my reasoning?
JOE

I'm surprised no one has mentioned Roth conversion. IMO, the best
thing about doing an IRA rollover is the subsequent Roth conversion.
There are all sorts of benefits to doing the Roth conversion:

1) Roth's are "denser" than traditional IRAs, so you'll effectively be
tax sheltering more money (assuming you don't dip in to your IRA to
pay the tax bill).
2) After 5 years, you can withdraw the converted amount without
penalty.
3) Roth distributions don't affect the tax on Social Security
benefits.
4) Roth's aren't subject to required minimum distributions.

--Bill

darkness39[at]yahoo.com writes:
- quote -

Regardng this - unless you have very good reasons for
that VA, it may actually be worth, if necessary, paying
termination fees and getting out of it. VAs can have
ongoing expenses of 2% or more (usually paying for
guarantees that you may have no need for). Even if
you have to pay 8% to get out of it, you'll recoup
that cost pretty quickly in low-expense no-load mutual
funds which otherwise invest similarly to whatever
you've chosen inside the VA (assuming such choices
themselves were made well).

- quote -

Tyson really is wonderful, however, I'd definitely start
with PersFin. MF for Dummies is kind of a big expansion
of a chapter or two of PersFin and if the OP wants to
learn more about them - after getting a handle on his
bigger picture - I'd certainly recommend MF for Dummies
or even Investmenting For Dummies.

- quote -

I'd certainly want to talk about rolling the 401k into an
IRA for a variety of reasons. As far as what he invests
the IRA itself into, though, even that can wait until he
gets a better handle on the current situation and in the
meantime, leaving it in cash (ie. Vanguard's Federal MMF
is paying > 5% right now) is not a big deal.

- quote -

20 years is a long time. I should hope it won't take him that long
to read a book or two and figure out what to do! (ie. probably
not leave it in cash for the long run)

--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting

On Mar 28, 3:52 pm, BreadWithS...[at]fractious.net wrote:
- quote -

Mutual Funds for Dummies is also good.

My own thought is the OP should consider rolling the 401k into an IRA,
and investing in an index fund like the Vanguard Total Market Return
fund. The key being low costs, and performance broadly in line with
the market. In 20 years time, at an 8% pa return (not an unreasonable
expectation for a broad stock market index fund), the OP would have
something like 4.7 times his/her money.

Whereas if invested in a cash or bond fund returning 4.5% (again not
unreasonable) he/she would have 2.4 times his original investment.

On Mar 28, 12:25 pm, "bo peep" <cowartmi...[at]yahoo.com> wrote:
- quote -

Somewhat true. I'm guessing you stumbled across the "seperation from
service" exception that I forgot about earlier today. In this case,
the 401(k) is from an employer he no longer works for and the OP was
not 55 or older at the time of "seperation from service" so he cannot
use the exception and should still roll over the IRA.

IF he had been 55 or older that would have been an advantage I
overlooked.

On Mar 27, 2:36 pm, "kastnna" <kast...[at]auburnalum.org> wrote:
- quote -

With one exception - in the "window" between age 55 and 59.5, if he
becomes unemployed, he can withdraw 401k funds without the 10%
penalty, unlike the situation in an IRA.

John Cowart

"PeterL" <po.ning[at]gmail.com> writes:
- quote -

It's a very common thing for folks to do, and, yes, it's
usually a mistake. But VAs are far from obvious devices
and folks are often sold them without understanding what
they are or why they should have them. (It may be possible
that there is a case to be made for a VA in an IRA rollover,
if the case can be made for the VA at all - on the basis
of wanting some of the riders/guarantees. But it's very
unlikely that this was really the situation here).

- quote -

To the OP - several of us here highly recommend Eric Tyson's
book Personal Finance For Dummies. Don't be put off by
the title or bright yellow cover. It's a very solid book,
a pretty easy read, has some decent worksheets, and I can't
think of a better starting point to help you find a path
to get over the "getting antsy" stuff. It's not for the
sophisticated investor or financial engineer, and it won't
tell you how to read a balance sheet or evaluate an individual
stock. But truthfully, most folks don't need that stuff
anyway. What it will do is help you navigate the forest
of 401k, IRA, VA and other insurance products, etc.



--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting

Thx. Great feedback. Just for clarity, this is an old 401k from former
job. I have an active 401k at my current job which is doing poor to
so-so. Two 40l(k)s.

Did some research. I have some control of old 401k (can reallocate funds)
which is good news. Will take everyone's advice and FIRST educate myself,
then make a choice about old 401k money.

On Mar 27, 4:36 pm, "kastnna" <kast...[at]auburnalum.org> wrote:
- quote -

If you've left the corporation, than yes, I agree move it to an IRA.
Next, decide what type of IRA you want. You can talk with most
planners and they don't charge for that, but see what is available by
all means.


======================================= MODERATOR'S COMMENT:
Please trim the post to which you are responding. "Trim" means that except for a FEW lines to add context, the previous post is deleted.

On Mar 27, 10:46 am, "CMJohnson" <johnso...[at]mail.com> wrote:
- quote -

1. 401(k) often have higher fees and fewer investment choices.
Furthermore, because you no longer work for the employer you also have
limited access to plan administrators/advisors. Bankruptcy and
corporate restructurings can also cause problems. There is nothing but
upside to moving to a self-directed IRA.

2. I'm not anti-annuity by any means, but they usually should not be
used in a qualified plan. Comingling the two vehicles will result in
"benefit redundancy" for which you are expensed twice. Secondary
guarantees are the only possible advantage, but at your age even that
argument is a stretch. We have recently discussed annuities at length
on this group should you choose to research further.

3. Joe is correct that using a financial planner can eat into returns.
However, your question implies that you have limited financial
planning experience. You may be safer paying the 2% than you are
taking on the burden of financial planning yourself AT THIS TIME. You
should learn as much as you can so that you can ween yourself off of
the financial planner in the future. You can also do better than 2% in
fees. My firm (which shall remain nameless) charges around 80 bps for
households with more than $250K and 1% for all accounts below that. We
sell mostly ETFs with expenses around 20 bps and charge no
commissions. Thats 1 - 1.2% total.

***Look at it this way, I pay a mechanic to work on my car because the
risk of doing it myself is too great. With my limited knowledge of
automotives I would likely cause $2000 in damage trying to save $200
in repairs. Maybe someday in the future, when I am more knowledgable
and have more time, I will change my own oil. But not for now.

On Mar 27, 2:01 am, "fee-fi-ster" <h...[at]nospam.protected.com> wrote:
- quote -

So you are using a tax deferred vehicle inside another tax deferred
vehicle?


- quote -

How long have you had this 401K, and what is it invested in?


- quote -

Start by getting some education before you make any moves.

- quote -

fee-fi-ster wrote:

- quote -

I agree with John's reply, the Roll over to IRA.

An annuity is a tax deferred vehicle, so is an IRA.
The expenses associated with the annuity should provide you tax deferral
you otherwise would not have. Putting an annuity into an IRA or for that
matter, putting Tax Free Muni bonds into an IRA, is not a wise thing to do.

At 40, as much of your return in the next 25 years will come from the
fees you avoid as from the asset allocation you choose.
I pull the number 2% out of my er, hat, to tell you that you may choose
a planner who will charge 1% and then put you into a fund charging 1% or
more in its own expenses. Over 25 years you will have lost half your
account to the fees. Think about this and choose wisely.
JOE

On Mar 27, 5:01 am, "fee-fi-ster" <h...[at]nospam.protected.com> wrote:
- quote -

A self directed IRA is a good thing, but don't move money you don't
have to. It may be as simple as reallocating what you already have to
different investments within your 401k. Proper asset allocation will
insure that your dollars are working for you and that you can preserve
capital. Annuities are good too, but there are many more investment
vehicles and life insurance products out there also. You should also
consult a financial advisor. If there are good investments available
in your retirement account, a good advisor will help you maximize that
plan so you can retain the benefit of the company match.

Christopher Johnson
Financial Advisor
Waddell and Reed
(304) 518-1131
cmjohnson[at]wradvisors.com

In article
<7dfc2343ef3d1704b4cf134586e3cc9d[at]localhost.talkaboutinvestments.com> ,
"fee-fi-ster" <hmmm[at]nospam.protected.com> wrote:

- quote -

I always like to have control of my money. As a result, I suggest
doing a rollover into a self-directed IRA. From there, look at
low cost funds that track major indexes. Avoid programs where
you give up control, like an annuity or whole life insurance.

-john-

--
================================================== ====================
John A. Weeks III 952-432-2708 john[at]johnweeks.com
Newave Communications http://www.johnweeks.com
================================================== ====================