2010 IRS to Roth conversion.

[AZ-Tax]

Got a client age 52 wants to withdraw his 401K. Seems to me this tax law does not pertain to 401K but only IRA's, correct? If not, could the 401K (in this example lets also include IRA) be converted into a Roth then withdraw the Roth shortly after the conversion (if allowed) thus avoiding the 10% excise tax?

[veritas]

The conversion

to a Roth and then a distribution won't avoid the penalty.

[Lion]

Borrow

Could he accomplish his purpose by borrowing from his 401(k) and give himself the flexibility to continue to make contributions if he wishes and to repay himself with interest instead of some financial institution?

[veritas]

Why

does he want to distribute his 401K?

Doesn't sound like a very good idea.

[FEDUKE404]

Snake oil lessons

Could he accomplish his purpose by borrowing from his 401(k) and give himself the flexibility to continue to make contributions if he wishes and to repay himself with interest instead of some financial institution?

I've always loved the "repay yourself" position that the banks push.

I finally got a 401(k) rep who was giving the talk to admit that if you withdrew $25k from your account through a loan, you also were essentially removing all of the (tax-free) EARNINGS & APPRECIATION from said $25k as the principal was removed until you "repaid yourself" and replaced said principal along with some interest.

And, of course, woe be unto you if you left that employer prior to repayment of the loan. I've had more than one client who received an unexpected surprise Form 1099-R under such circumstances.

But it does sound good!

FE

[Lion]

Already considering

Since this guy is already considering taking a distribution, he would be no worse off borrowing and not getting it all paid back.

Long ago when I was not a tax preparer but an employee in a company with a 401(k), I saw a colleague borrow from his and repay with a very high (but accepted by the company's outside CPA who did the various discrimination testing, etc., of the plan each year) interest rate and essentially put more in each year than the max contribution. Each year he maxed out his contribution and borrowed the 50% or max allowed and repaid it with what was then double-digit interest rates and built up his balance rapidly.

[taxmom34]

if this taxpayer needs money and is intent on taking a distribution , but wants to avoid the 10% penalty, the only solution i see is to take a loan from the 401K and no penalty.

[Burke]

I've always loved the "repay yourself" position that the banks push.
I finally got a 401(k) rep who was giving the talk to admit that if you withdrew $25k from your account through a loan, you also were essentially removing all of the (tax-free) EARNINGS & APPRECIATION from said $25k as the principal was removed until you "repaid yourself" and replaced said principal along with some interest.

And, of course, woe be unto you if you left that employer prior to repayment of the loan. I've had more than one client who received an unexpected surprise Form 1099-R under such circumstances.But it does sound good!FE

I am not sure he was correct. He may have been, and this may vary from plan to plan, but in my old 401k plan with a large corporate entity, the borrowed amount was not "removed" from the total amount invested. It was simply borrowed against, and the full amount continued to earn interest at the current rate (or stayed in the variable investments) effectively lowering the actual cost of borrowing. It was only "removed" on termination with an outstanding loan balance or actual withdrawal. And then you were given fair warning and an opportunity to repay before termination occurred.

[FEDUKE404]

Clarification

I am not sure he was correct. He may have been, and this may vary from plan to plan, but in my old 401k plan with a large corporate entity, the borrowed amount was not "removed" from the total amount invested. It was simply borrowed against, and the full amount continued to earn interest at the current rate (or stayed in the variable investments) effectively lowering the actual cost of borrowing. It was only "removed" on termination with an outstanding loan balance or actual withdrawal. And then you were given fair warning and an opportunity to repay before termination occurred.

Perhaps so in your case, but definitely NOT with this plan which happened at the time to be the plan that managed the 401(k) program for all state employees.

It was NOT collateral but a somewhat free removal of your own funds. The quarterly investment statements for individuals who had gone that route definitely showed the reduction in total account funds (and related earnings) for the time the "loan" was in play. The only difference was the income tax component was not there until later, or if eventually repaid not at all.

In a strong stock market (assuming such type of investments were chosen as opposed to the so-called money market rates) the plan owner could actually be suffering a net loss, even with the "low" loan rate and the "paying yourself" mantra.

As I said earlier, the representative did not like to admit it (especially in front of a large audience) but eventually did so after a few pointed follow-up questions.

FE