1. What if I have a $1 million 401k, can I convert that to a Roth IRA?
This was a real question, but a hypothetical what-if scenario to understand the Roth IRA conversion limitations. The answer is yes, you can convert a $1 million 401k to a Roth IRA. In fact the IRS would love for you to convert a large 401k to a Roth IRA because like any conversion you would have to pay tax on the converted amount and that would be a revenue generator for the IRS. Once converted and held for 5 years, the benefits are the same as a regular Roth IRA – tax-free growth, ability to withdraw your money without tax or penalties, and of course no RMDs. So why would the IRS love such a thing? Because the IRS is shortsighted; they see the immediate tax revenue as a boon, not recognizing that they will never be paid on that money again.
2. If the annual IRA limit is $5,500, how can I convert a large 401k into a Roth IRA, especially if I make too much money?
This is a question I receive frequently. The law changed in 2010 paving the way for many high income earners. There are two keys words to remember: contribution and conversion. If you make too much money you cannot contribute to a Roth IRA; however, the law changed in 2010 which allows anyone (regardless of their income) to convert a regular IRA to a Roth IRA. The change also created the opportunity for the Backdoor Roth IRA. Therefore, assuming you converted a $1 million 401k into a Roth IRA, you could still make a $5,500 contribution to your Roth IRA whether directly or through the backdoor.
3. My spouse does not work, can he/she contribute to a Roth IRA?
Yes, a non-working spouse can use the income of the working spouse to become eligible for the Roth IRA. Therefore a married couple can contribute a combined $11,000 in 2013. Of course the working spouse must have at least $11,000 of earned income.
4. Is there anything I should do before year-end?
Most IRS and tax related deadlines are in April following the tax year, however, there are some benefits that must be taken advantage of before year-end. For example, if you have a 401k, 403b, 457b, SIMPLE IRA, or a similar retirement plan, your contributions must be made during the calendar year. To avoid missing out, calculate your total year to date contributions and subtract that number from the annual limit to determine how much more you need to contribute to maximize for the year. Also, make sure to use up the balance of your flexible spending account because any leftover money is forfeited.
Have a financial question? Contact ACap Asset Management at info@acapam.com or 818-272-8511.
Ara Oghoorian, CFA, CFP® is the president and founder of ACap Asset Management, Inc., a “Fee-Only” investment management firm located in Los Angeles, CA specializing in helping doctors and physicians make sound financial decisions. Visit us at www.acapam.com
