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Reply to @WxByHart: Unless I am missing something in what you said, your agent is not only wrong about the annuity benefits, but he is giving you totally wrong advice about the Roth rollover. You CANNOT take money from your Roth 401k and move it to an account in your wife's name without paying taxes on the gain (assuming there is one). The process for this is 1) liquidate $10,000 from the 401k and choose whether to have taxes withheld, 2) you receive a check from the 401k custodian, 3) you deposit the check in your bank account, 4) you write a new check to the custodian for your wife's new IRA and send the check to the new custodian. If you do not have taxes withheld, understand you will have taxes due for 2012. If you want to have $10,000 for the new IRA, you will need to gross up the distribution if taxes are withheld.
No matter what, you cannot roll the dollars from YOUR 401k to your spouse's IRA. That is something the IRS does not like. There is a chance this might never be caught, but do you want to take that risk? And understand that since you are not 59 1/2, you will need to account for a 10% early withdrawal penalty. The only exception to all of this is if you only withdraw dollars you have contributed. But even then, you must make a distribution, deposit the distribution, then write a check to the new custodian. Did your agent explain this to you?
Whether your wife's account and your own IRA are with the same company is of no advantage, other than convenience and potential fees/expenses.
Reply to @mclaugh: All insurance agents will share the same bias - sale commission. A better choice would be a fee-based advisor to sort out the pros and cons of annunity, most of which already discussed here.
Reply to @BobC: The distribution rules for Roth 401Ks say that if you do a partial distribution and partial rollover/direct transfer, the taxable portion of the Roth (i.e. the earnings on the post-tax contributions) go first to the new Roth (see Partial 60-day rollover of the Roth 401(k) in this NYS Society of CPAs article). So the partial distribution used to pay for the traditional IRA contribution would likely be tax-free (i.e. be attributed to the original post-tax contributions). And as you implied, there's never a penalty on tax-free distributions, qualified or not.
That said, there are loads of other problems with this. Start with the possibility that the employer will have to withhold money from the distribution (especially if the Roth 401K to Roth IRA is done via 60 day rollover). Then there's the question of why one would ever want to fund an IRA with Roth distributions - the whole idea of Roth conversions is to do the reverse - get tax deferred money into tax-exempt accounts. If you've got the spare cash to fund the IRA contributions, then why ever take money out of a Roth do do that? And if you don't, then you'd really better watch out for those withholding traps.
Finally, if taking money out of a Roth and using it to fund a traditional IRA was such a great idea, why didn't he suggest taking money out of the VA Roth IRA and funding a traditional IRA? The money's been in the VA long enough that there's no withdrawal penalty from NW. And it could have been done years ago. The distribution rules from Roth IRAs is simpler - the contributions come out first - so that's non-taxable.
Honestly, I may have confused what my agent said about the Roth versus non-Roth aspect of this rollover to an IRA in my wife's name. So from what I gather, there is no way to take any of my 401-k (Roth or non-Roth), and somehow get it into a new IRA under my wife's name without some sort of early distrubution penalty. He was trying to get me an extra tax deduction on this year's return (by, of course, putting it into a new NWM IRA Deferred Variable Annuity under my wife's name).
Yes, there is a way, but it sounds like you may not be clear on what creates that tax deduction. It's the fact that you're contributing money to a spousal IRA. It doesn't matter where that money comes from.
If the only way you can come up with the cash to fund that IRA is by taking a distribution from another retirement account, then perhaps that deduction isn't doing too much for you now, and you'd be better leaving the money in a tax-exempt account growing tax-exempt, rather than moving it to a tax-deferred account, where the growth will ultimately get taxed as ordinary income.
If this is a short term cash flow problem, you can move the money to the new employer account and borrow against it. (Something else that's not advisable, but it can beat outright withdrawing the money.) Technically, that's a way of taking 401K money and getting it somewhere else. At least for awhile. Note that you can do this only with a current employer's 401K, and the loan is due upon termination of the job, if not sooner.
As I described in a prior post, if you take a distribution of the Roth401K, roll most of it into a Roth IRA, then the remainder may be tax (and penalty) free. Then you have the cash to do with as you will - contribute to your wife's IRA, go on vacation, whatever. For example, say that you've contributed $6K to the Roth 401K, and it's now worth $9K. If you transfer $4K to a Roth IRA, the IRS says that this $4K includes the $3K of gains and $1K of original contributions. The remaining $5K consists entirely of contributions. They're tax-free. No penalty. That gets you $5K to play with. But also as I noted above (as did BobC), watch out for possible withholding on the distribution.
Comments
No matter what, you cannot roll the dollars from YOUR 401k to your spouse's IRA. That is something the IRS does not like. There is a chance this might never be caught, but do you want to take that risk? And understand that since you are not
59 1/2, you will need to account for a 10% early withdrawal penalty. The only exception to all of this is if you only withdraw dollars you have contributed. But even then, you must make a distribution, deposit the distribution, then write a check to the new custodian. Did your agent explain this to you?
Whether your wife's account and your own IRA are with the same company is of no advantage, other than convenience and potential fees/expenses.
That said, there are loads of other problems with this. Start with the possibility that the employer will have to withhold money from the distribution (especially if the Roth 401K to Roth IRA is done via 60 day rollover). Then there's the question of why one would ever want to fund an IRA with Roth distributions - the whole idea of Roth conversions is to do the reverse - get tax deferred money into tax-exempt accounts. If you've got the spare cash to fund the IRA contributions, then why ever take money out of a Roth do do that? And if you don't, then you'd really better watch out for those withholding traps.
Finally, if taking money out of a Roth and using it to fund a traditional IRA was such a great idea, why didn't he suggest taking money out of the VA Roth IRA and funding a traditional IRA? The money's been in the VA long enough that there's no withdrawal penalty from NW. And it could have been done years ago. The distribution rules from Roth IRAs is simpler - the contributions come out first - so that's non-taxable.
I agree with mclaugh - get another agent.
If the only way you can come up with the cash to fund that IRA is by taking a distribution from another retirement account, then perhaps that deduction isn't doing too much for you now, and you'd be better leaving the money in a tax-exempt account growing tax-exempt, rather than moving it to a tax-deferred account, where the growth will ultimately get taxed as ordinary income.
If this is a short term cash flow problem, you can move the money to the new employer account and borrow against it. (Something else that's not advisable, but it can beat outright withdrawing the money.) Technically, that's a way of taking 401K money and getting it somewhere else. At least for awhile. Note that you can do this only with a current employer's 401K, and the loan is due upon termination of the job, if not sooner.
As I described in a prior post, if you take a distribution of the Roth401K, roll most of it into a Roth IRA, then the remainder may be tax (and penalty) free. Then you have the cash to do with as you will - contribute to your wife's IRA, go on vacation, whatever. For example, say that you've contributed $6K to the Roth 401K, and it's now worth $9K. If you transfer $4K to a Roth IRA, the IRS says that this $4K includes the $3K of gains and $1K of original contributions. The remaining $5K consists entirely of contributions. They're tax-free. No penalty. That gets you $5K to play with. But also as I noted above (as did BobC), watch out for possible withholding on the distribution.