Might Be Time to Roll Your Pension to Your Roth
If your pension plan has taken a hit because of the declining Wall Street numbers, this could be a great time to roll it into a Roth account.
You will pay tax on the current value on the amount rolled from your pension into your Roth account at the time of the rollover. So, if the value is at a low point, you’ll pay less tax. Then when the value increases, it will be in the Roth account and increase tax free.
If you make over $100K per year in adjusted gross income, you can not make a rollover until 2010, however. As with other tax and financial strategies discussed through this blog and the First Class Lounge forum, make sure you take your personal advisor to see if this makes sense. But, you’ve got to admit it, it would be nice to make a phone call today with something positive to talk about!
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At last I have found a silver lining.
A few months ago I rolled 2 former employee 401k plans into a Fidelity IRA. That was the first step to the plan of eventually converting to a Roth Solo 401k, which I am eligible. Since that time the account value has dwindled from 58k to just over 7k.
What is the conversion process at this point? Is it necessary to sell and then re-buy the stock or simply set up the new account and transfer the shares: Would the 7k be penalized for early withdrawal and taxed at regular income levels for this year? If so, can I offset the amount with other non IRA stock losses exceeding that amount?
It seems as if this could be a terrific time to minimize the tax liability.
This could be a silver lining for a lot of people, actually. I need to write an email to everyone about it because I think many people are going to overlook it.
One more note, please check with the custodian on your Roth. To my knowledge, you can’t roll into the Solo Roth. You can, set up a separate rollover Roth, though. Just make sure you’ve got the right pension plan in place and that you will qualify.
As far as the “how”, contact the custodian of the Roth plan. In other words, the company who is holding the current or future Roth. Let them know you want to roll over a pension. They’ll send you paperwork and handle it all themselves. You do NOT want to withdraw the money and put it in the plan yourself. If you’re not careful, you can get hit with an early distribution penalty.
You will pay tax on the amount rolled over, at your current income level.
Is there any way to revoke a conversion to Roth? I have the opposite problem—I converted last year when I was getting super high returns on the self directed investments. Two weeks after I converted I was notified my investments are now bad. Now I have a 1099 for a ton of “income” I will never see, and can not write off an IRA bad debt and have no more interest income. Anything I can do to have that 1099 excluded from taxable income?? THANKS!!
MAYBE!
Some key points - get a very good tax advisor helping you with this. If you did it in 2007, do NOT file your tax return until you have this sorted out. If you already have filed, you are too late most likely.
Here are some details:
The IRS permits IRA owners to recharacterize Roth IRA contributions from one type of IRA (i.e. Roth or traditional) to the other. This applies to both the ordinary annual contributions and the conversion contributions. The deadline for recharacterizing a contribution or conversion is the extended due date of your tax return for the year of contribution or conversion.
Contact a good CPA right away. If you’d like to work with us on this, please contact Richard through Richard@DKTaxServices.com and he can explain how we work with clients.
I hope this works out for you. Excellent question, by the way.
Thank you so much for the tip—I have a week left to figure this out. Is there a specific IRS statute you can direct me to direct my CPA too?
I concluded that by taking the REP status this year—which I wanted to avoid per your advise, even though I have 10 properties and definitely qualify—I thought I would be able to take all my unused losses from prior years to offset this Roth conversion “income” but,apparently according to the CPA, I can NOT take any of the unused losses until the properties are disposed? (REP or not). that is a bummer. am I missing something? If I can get my Roth income recharacterized back to non taxable IRA money then I don’t need to chance the REP status audit flag and be fine with the $25,000 PAL. any other thoughts on the subject?
I found it!!—it’s in Pub 590 about the middle of the way through..this is a life saver!!! I am going to have my ROTH recharacterized back to traditional IRA on next week—hopefully the trustee (Equity Trust) will do it!!! THANKS AGAIN!! this will save me thousands!!
p.s.I had just gotten your IRS audit prep kit preparing my 2007 return with all your advise in mind…..
I did it!! Equity Trust had a simple 1 page recharacterization form.That’s it—it’s rolled back to my regular IRA. Now I can exclude that 1099 from taxable income!! This is a life savor!! Thank you soooo much!! Is there a special statement I have to attach to my return when I file it to address this? The IRA form I found on the subject is only for partial recharacterizations.
Also, will this be an audit flag? One of the benefits of this is to avoid REP audit flag, but hope I am not creating another……