Tax & Retirement Questions – Answered!

February 20, 2014 : Kevin Martin

Editor’s Note: There’s more to a retirement account than just opening one and forgetting about it. As you make changes over the years, there may be tax issues to consider. Today we have Kevin Martin, from the Tax Institute, answering common retirement questions about Roth IRA conversions, 401(k) accounts, and rollovers.

Roth IRA Conversions

Question: I would like to convert money from a traditional IRA to my Roth IRA, is there any conversion limit? This year I am eligible to contribute $6,500 to my Roth IRA. Can I add both new money and converted money to my Roth in excess of the $6,500 limit?

There is no limitation on the amount of your traditional IRA that you can convert to a Roth IRA. You may convert your traditional IRA and make regular Roth IRA contributions in the same year. The regular contributions are not added to the converted amount.

However, the conversion of any pre-tax amounts held in the traditional IRA would be taxable. So, if you previously deducted your traditional IRA contributions, o if you previously transferred funds into the traditional IRA in a nontaxable rollover contribution, part of the converted amount will be taxable in the year the conversion occurs.

Withdrawals from a 401(k)

Question: My income for 2013 is $57,000. I claim jointly with my wife. We have two children and one income. I want to withdraw my 401(k) of $39,750, but how will it be taxed?

The first thing you must determine with regard to a distribution from a 401(k) plan is whether you made any after-tax contributions. After-tax contributions are those that were included in your taxable income when you made them.

In most cases, contributions made to a 401(k) are pre-tax contributions, meaning they were not included in your taxable income. Any distribution of pre-tax contributions will be taxable. If you did not make any after-tax contributions, the full amount of the distribution will be taxable.

On the other hand, if you made after-tax contributions, then the full distribution of the 401(k) plan in this case will not be taxable up to the amount of those after-tax contributions. Any earnings accrued on either pre-tax or after-tax contributions while you held the account would be taxable. The tax rate depends on your tax rate, which depends on knowing other facts about your return to compute. You may want to speak to a tax professional to figure out your tax rate.

If you receive the distribution while you are under age 59½, you may also need to pay a 10% additional tax on the 401(k) plan distribution. If in this case the full amount of the distribution is taxable, the additional tax (not including the regular income tax amount on the distribution at your tax rate) would equal $3,975.

HSA Contributions

Question: For taxes in 2012, I reported a rollover from another insurance on the HSA form. Should that rollover be counted as a contribution to HSA for 2013 taxes?

No, the rollover you did in 2011 will not be reported as an HSA contribution when you do your taxes in 2012.

A rollover from one HSA to another HSA can be done either through a direct trustee-to-trustee transfer or as a distribution from the first HSA and then a subsequent transfer of that distributed amount back into the second HSA. This transfer to the second HSA must occur within 60 days of the original HSA distribution.

In either case, you should not report the rollover as a deductible HSA contribution on your return. A rollover that meets all of the necessary requirements will not count toward your annual HSA contribution limit. In fact, you do not even need to be eligible to make regular HSA contributions to perform a rollover from one HSA to another.

Hopefully this article gave you answers to common retirement questions. For more information on retirement savings, head here.

Related Topics

Kevin Martin

Kevin Martin

The Tax Institute, H&R Block

Kevin Martin, JD, LLM, is a lead tax research analyst at The Tax Institute. Kevin leads research teams focused on estate, trust, gift, retirement, IRS procedures and state and local tax issues.

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