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 Dear
Tax Talk,
Upon retirement, I will be moving my 401(k)
to a self-directed IRA. However, my goal is to
move the entire sum to a Roth IRA to get the government
out of my retirement funds as quickly as possible.
What is the best way to accomplish this with the
least tax consequence?
-- Jim
 Dear
Jim,
Whether you are in a traditional IRA or a Roth,
the government is still involved. All IRAs need
account custodians. The custodian is the institution
that reports the IRA to the IRS for regulatory
purposes. A traditional custodian, such as a bank
or brokerage house, will only allow the owner
to invest in certain assets -- usually highly
liquid and regularly traded investments.
A self-directed IRA allows the owner to have more discretion
in investments. In a self-directed IRA, you can
invest in real estate or private placements. You
still can't invest in antique cars, artwork or
fine wines because the government doesn't want
you to drive, display or drink your account balance.
The major difference between a traditional
IRA and a Roth is the taxation on the distribution.
A Roth IRA is tax-free on the distribution, whereas
the traditional IRA distribution is taxable. To
get to a Roth, you have to pay the tax upfront
on the original investment in the Roth. I am of
the opinion that deferring taxation is the best
strategy.
The government is not really "in
your IRA" until you distribute, and then
it is really on the outside of the IRA getting
its tax money from distributed funds. Therefore,
I'm not sure what you want to accomplish by this
strategy other than paying taxes today.
If you think you are in a position to capitalize on a good investment and
you want that to grow tax-free, then maybe you should
only convert so much of the rollover to a Roth that
allows you to make that investment. One last thing
to consider: Interestingly enough, if you wait until
2010 to roll over funds, special rules for that
year allow you to pay the rollover tax over two
years.
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