Wife's job change and her 401K

Gary

Wife worked for a large box store till May 1, 2017 and was involved in a layoff. They would not hold her 20 years of 401k investments and were required to make a distribution - so we directed the funds to in her ROTH IRA at another MF investment company with plans of paying the required taxes end of this year. Does anyone see any problems with doing this! Also the first of September she has went back to work at the same company but at a different location. Was wondering about the possibility of having the 401K funds in her ROTH IRA - plus gains transferred back to the same 401K fund administrator for the company.

Any response or ideas would be appreciated.

Thanks

Gary

billr

I'd keep it as an IRA, not 401k. There are more investment choices available to you.

The only reasons to put it back in 401k are:
1) if you want early retirement, you can get at the funds without penalty a couple of years earlier.
2) if the 401k plan has access to some particular funds that you otherwise can't invest in.

Bill

LLJB

I'm not a tax guy so please double check my understanding. It sounded like the transfer has already happened from the 401K at your wife's employer to her Roth IRA at a mutual fund company. If that's true I'm not sure how easy it is to undo it because I think it would be considered a withdrawal from a Roth without waiting what I believe is the required 5 years and that would probably incur a penalty. If the transfer isn't done yet and you still have the option to change your mind, one advantage of transferring to a rollover IRA rather than the Roth IRA is that you don't pay any tax. Depending on your situation and what you believe/want to bet on about Trump's tax plans, you might potentially pay lower tax on a Roth conversion if you waited until a new tax code is in place.

As an addition to Bill's comments, I believe once you wait the required 5 years after converting to a Roth IRA, you're able to withdraw what you "contributed", or in other words what you've paid tax on, at any time without penalty. It's only the gains on what you contributed that you're not allowed to withdraw until retirement age without penalty.

davidrmoran

? rollover woulda been the way to do it, not roth, so ask the brokerage institution if it is too late to unwind (may be) and revert

msf

After 20 years, I'm guessing that your wife had at least $5K in the 401(k).

"Generally, if your account balance exceeds $5,000, the plan administrator must obtain your consent before making a distribution." IRS 401k guide.

While what's done is done, forcing your wife to take the money was likely illegal.

You have the option of recharacterizing the Roth conversion into a traditional IRA and not owe any taxes. You could then move the money back into the 401k (pre-tax) if that's where you really want it. However, you can't try to undo everything in one step by having the 401(k) take back the money (pre-tax) straight from the Roth IRA.

How can I recharacterize an amount rolled over to a Roth IRA from an employer-sponsored retirement plan?

You can only recharacterize amounts rolled into a Roth IRA from an employer-sponsored retirement plan by transferring them to a new or existing traditional IRA, and not back into the plan from which they were distributed.

IRS: IRA FAQs.

If you want the money back in the 401(k) as a Roth 401(k) (and if the plan offers this and allows the transfer), then you could move the money back via a trustee-to-trustee transfer.

Note: After having converted to a Roth IRA, you can withdraw the amount converted (but not subsequent earnings) without owning tax on that money (since you just paid that tax). But so long as your wife under 59.5, there will be an early distribtution penalty of 10% for the first five years after conversion.

Fairmark: Distributions After a Roth IRA Conversion

Gary

Thank you for your Input:

To answer some questions -

The second line in the IRS 401K guide has this "have a severance from employment" so I would think the distribution was normal and legal.

Next my wife is over 60yo.

Then the size of distribution is in the mid six figures.

The distribution will most likely stay in the Roth IRA as of now.

Just looking for ideas.

Thanks

Gary

msf

It was certainly legal for your wife to elect to take a lump sum distribution. It's her company forcing that distribution on her (i.e. without obtaining her consent) that does not appear to have been legal.

You're going to take quite a tax hit on a mid six figure conversion if you do it in one year. You might want to spread it out over a few years (recharacterizing part of it to a traditional IRA). Though that could bump Medicare premiums (IRMAA) or make SS checks taxable, or other bad stuff.

Converting quickly, keeping within tax brackets, watching out for other tax impacts - it's not an easy needle to thread.

bee

@Gary,

You would complete an (Traditional, 401K, 403b, etc.) IRA to Roth IRA Conversion if the future Rate of Return (ROR) will be higher for the Roth IRA comparef to a tax deferred IRA. Article below discusses this in detail using this calculator (Optimal Retirement Planner).

From Article:

A onetime conversion of the entire IRA during the first year of retirement is technically feasible, sometimes practiced, but rarely part of an optimal plan.

Also, for strategic periodic IRA to Roth IRA conversions,

We find that in comparing two optimal plans, differing only in whether or not conversions are allowed, that there is in the neighborhood of a 1 percent improvement in the conversion plan’s disposable income compared to the non-conversion plan.

In the conclusion of article:

It would seem desirable to convert when asset prices are depressed because there is less tax paid and the state of the market is amenable to a recovery. Following the same logic, converting when asset prices are inflated would seem imprudent.

Measuring the Financial Consequences of IRA to Roth IRA Conversions

Old_Joe

Like msf said... kinda like threading a fairly good sized rope through the eye of a needle. Not to worry, though.. pretty soon our glorious leader will simplify all of this stuff down to a level that even he can understand, then the rest of us will be in good shape.