Roth IRA Tax Question

[Maikeru-sama]

Long story short, I am leaving the Public Sector after working there for 2 years and I start my new job on 7-19.

The City I work for has a pension and we pay into what is called TMRS (Texas Municipal Retirement System). I have been told that I cannot roll this straight into a Roth IRA.

My question is, when I cash out my TMRS account, if I put the cash out into a Roth IRA, will I still have to file this as income for the year or if I can prove that it went into a Roth, not have to report it as revenue?

 

[CoCo]

Long story short, I am leaving the Public Sector after working there for 2 years and I start my new job on 7-19.

The City I work for has a pension and we pay into what is called TMRS (Texas Municipal Retirement System). I have been told that I cannot roll this straight into a Roth IRA.

My question is, when I cash out my TMRS account, if I put the cash out into a Roth IRA, will I still have to file this as income for the year or if I can prove that it went into a Roth, not have to report it as revenue?

Basic difference between a Roth & regular IRA is this: Regular IRA defers taxation on your contributions (within limits) and earnings until you make qualified withdrawals. Roth IRA contributions do not shelter you from taxation. The contributions are "post-tax". The earnings within the Roth however accumulate tax free (not deferred, but free). So when you start making qualified withdrawals they are completely tax free (you already paid tax on the principal, and you never pay tax on the earnings.) Regular IRA withdrawals are fully taxable.

Now I would certainly get more professional advice than mine but I'll be shocked if you can roll $ from a pre-tax plan like your pension into a post-tax plan like a Roth and NOT be taxed. That would make no sense.

Now rolling into a regular IRA without taxation would make sense.

 

[Maikeru-sama]

Yeah, I am aware that the government is going grab their share before I even get the cashout.

However, the the question is will that remaining cash out, after the Government has gotten their share have to be reported as revenue as well when I do my taxes if I put the remainder in a Roth IRA.

When I was laid off in 2008, I cashed out my 401K and of course, the Government got their cut before I got the rest. Now once I got the cashout after the Government got their cut, I had also report that as revenue for the year and that increased my taxable income.

Now, one of the exceptions was that if you used that money to buy a house, you wouldn't have to report it as revenue, I do remember that.

So now I am trying to find out if there is a rule that if I put it in a Roth, can I avoid having to report it as revenue.

 

[zrinkill]

With something like this ..... I would pay the money to see a professional.

Do not take any chances.

 

[CoCo]

Yeah, I am aware that the government is going grab their share before I even get the cashout.

However, the the question is will that remaining cash out, after the Government has gotten their share have to be reported as revenue as well when I do my taxes if I put the remainder in a Roth IRA.

When I was laid off in 2008, I cashed out my 401K and of course, the Government got their cut before I got the rest. Now once I got the cashout after the Government got their cut, I had also report that as revenue for the year and that increased my taxable income.

Now, one of the exceptions was that if you used that money to buy a house, you wouldn't have to report it as revenue, I do remember that.

So now I am trying to find out if there is a rule that if I put it in a Roth, can I avoid having to report it as revenue.

The governments "share" you're referring to is the "penalty for early withdrawal." 10% from memory but don't hold me to it. So in your 401k cashout scenario, you pay 10% plus whatever additional taxes are due from recognizing it all as income. That's what it sounds like you experienced on your 401k cashout and that makes sense.

The same thing will happen if you "roll" to a Roth IMO because no contributions to a Roth are tax deferred, rollover or new. If the governement allowed that you would never be taxed on the rollover which of course isn't going to happen.

With a regular 401k a qualified rollover will protect you from the penalty and will defer recognizing it as income. But it will of course be taxed when you retire and start withdrawals.

 

[CoCo]

BTW, if you don't want to pay for professional advice on this just call the IRS toll free number. You're question is very fundamental. Not controversial or tricky. You don't give your name or anything like that so don't be intimidated.

Or confirm with a reputable broker of Roths & regular 401k's. They are everywhere. They'll tell you they can't give you tax advice but the reality is that they have to know the differences between the two plans taxation features because they use them to guide their clients.

 

[Maikeru-sama]

I plan to call a professional, just wanted to see if anyone here had experienced this.

Besides, I think there is a disconnect on what I am asking.

 

[Dallas]

You don't have to seek a professionals advice. You can call the retirement folks w/ TMRS and they can answer this question for you and give you some alternatives maybe if you don't like the answers.

Our PERS system here at the state is very similar to TX.

You are also making a wise decision. I left the private sector years ago and am thankful I did. Most of my friends are making less money now or out of work completely.

 

[CoCo]

You don't have to seek a professionals advice. You can call the retirement folks w/ TMRS and they can answer this question for you and give you some alternatives maybe if you don't like the answers.

Our PERS system here at the state is very similar to TX.

You are also making a wise decision. I left the private sector years ago and am thankful I did. Most of my friends are making less money now or out of work completely.

Except his OP says he is leaving the Public Sector.

And of course every situation is different. No one right answer.

 

[jimmy40]

 

[Maikeru-sama]

Pretty much.

**dang, they deleted the pic**

 

[Bigdog]

Just speaking from experience, you are going to have pay the tax if you put it in Roth. You can estimate how much Federal tax you will have to pay by whatever tax bracket you are in (15%, 25%, 28%, 31%) and just multiple that by how much you are transferring. Hope this helps.

 

[SaltwaterServr]

Scariest words you'll ever hear.

 

[jimmy40]

Scariest words you'll ever hear.

I had my dance with the IRS back in the '90s, basically all of the '90s. Never again.