When Is An Ira Deductible
May 7th, 2011
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Question: Should I roll my 401K from my former employer into my Roth IRA to generate a capital loss?
From my calculations, it looks like I will be in the 25% tax bracket. The 401K is down significantly from my contributions into it, so it will generate a loss. I have been thinking about rolling it over into my Roth IRA for a while, and I figure now would be a good time because I would create a tax Deductible Loss and put more money in my pocket when I pay Uncle Sam. What do you guys/gals think? Is there something I am not thinking about? Any comments are appreciated.
Answer: 99% of 401Ks are pre-tax money. You never paid taxes on it, so your “tax benefit” when you cash out in a bad economy is that you don’t pay taxes on money that’s no longer there.
If you have a 401K that you can roll to an IRA, then to a Roth, you will be rolling a smaller amount and less income (YES, IT’S STILL INCOME), less tax.
Until you convert pre-tax money to post-tax money you don’t have a basis in the 401K. Only if, when you cash out all of your Roths and can show that you got back less than your basis would you have a crappy 2% schedule A loss. (Almost no one ever gets/uses that loss.)
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