401k to a Roth IRA in 2010

[minnie1928]

Ok, I need some opinions. I'm 36 and recently "retired" from my bank job when we relocated from PA to NJ. I will probably stay retired for another year or two (maybe longer or I might just work PT). My former employer recently sent me a form to ask what I want to do with my 401k balance. They are allowing me to keep the 401k in their plan (I can change this anytime in the future) or roll it into an IRA.

So here's the question, can I take the balance and roll it into an IRA and then convert the IRA into a Roth in 2010 when the rules change? I'm currently not eligible for a Roth IRA based on current guidelines.

[LivingAlmostLarge]

You made more than $110k gross this year if single? And didn't contribute to any 401k or anything to lower taxable income?

If not you can directly roll into a ROTH IRA. I'd probably do it next year when you have zero income.

[noppenbd]

I would roll it over into the traditional IRA immediately, and then convert it to a Roth in small chunks. Near the end of the year you can calculate your income and figure out how much room you have in your tax bracket. Then convert just enough of the Roth to stay within existing bracket.

For instance if your household taxable income in 2008 without conversion is $40000 and you are married filing jointly, you could convert $25100 to a Roth and pay 15% on the conversion. The 25101st dollar would get taxed at 25% so you would want to hold off until 2009 to convert more than that.

[LivingAlmostLarge]

Actually in 2008 the rules changed and you can directly roll it into a roth IRA.

[anonymous_saver]

I would do a direct rollover into a Roth IRA at Vanguard or another low cost place.

May I ask why you are not planning on working for a year?

[minnie1928]

Thanks for all the replies! I probably should have put some more info on the original post. I am married and my husband is the major bread winner. Our taxes this year will most likely be horrendous because we relocated and there are so many tax implications related to that. I will most likely be paying a tax professional this year to sort it all out...and I have an Accounting degree! Waiting until next year at the earliest would probably be better because our income will be less.

I'm taking at least a year off to help the family adjust to the new area and because in our new home my daughter can only attend Kindergarten for 2.5 hrs/day instead of full day like in our old school district. I know that I could enroll her in daycare somewhere and get a job, but I'm kind of burned out too. The past 2+ years I've been involved on implementing Sarbanes Oxley at my employer and that was not fun (to say the least!). It's really got me thinking about whether or not I want to continue in Accounting. The new law kinda took the fun out of it for me (and a lot of others too!).

[noppenbd]

Actually in 2008 the rules changed and you can directly roll it into a roth IRA.

True, but rolling a large 401k directly into a Roth may bump the OP into a higher tax bracket unnecessarily. Usually the better tack is to break it up into smaller chunks to stay within a low bracket. Of course depends on many factors like income and size of 401k. Definitely something to discuss with the tax preparer.

EDIT: One thing to remember is that I believe Roth conversions need to be done before Dec 31st to stay within current tax year (unlike Roth contributions which can occur up to April 15th of following year). So you may need to talk to the tax preparer early (Nov/Dec) to do it properly, if you qualify in 2008 or 2009.