Important point: You MUST file Form 8606 to report non-deductible contributions to traditional IRAs regardless of whether you convert them! This documents your basis so you don't get taxed twice. I learned this the hard way. If you've been doing backdoor Roth conversions without filing 8606s properly, you might want to amend those returns before a potential audit. The IRS has been paying more attention to Roth conversion strategies lately.

This is exactly why I always recommend getting a second (or third) opinion on complex tax situations! Your financial advisor is correct about the pro-rata rule applying. The IRS doesn't care which specific dollars you tell your brokerage to convert - they look at ALL your IRA balances together as one big pool. Here's what's happening: With $1.3 million in pre-tax IRA funds and only $7,000 in after-tax contributions, roughly 99.5% of any conversion will be taxable. The pro-rata calculation is: (Total after-tax basis ÷ Total IRA balance) × Conversion amount = Tax-free portion. Your tax specialist might be confused about the rules or thinking of a different scenario. I'd strongly suggest getting clarification from them about why they think it's not taxable. Also, definitely look into the reverse rollover strategy others mentioned - if your employer 401(k) accepts incoming rollovers, you could move that $1.3M there first, then do clean backdoor Roth conversions going forward. This is often the best solution for high earners in your situation.

This thread has been incredibly comprehensive and helpful! As someone who went through a similar 401k decision after a layoff, I wanted to add one more angle that might be useful. Since you mentioned you're in Illinois and looking at a potential career change, check if your local community colleges or state universities have any "dislocated worker" programs specifically designed for people in your situation. These programs often have partnerships with the Illinois Department of Employment Security that can provide additional funding beyond what the federal programs offer. Also, timing-wise, since your layoff is happening next month, you might want to consider whether it makes sense to delay any 401k distributions until early next year if possible. Being unemployed for part of 2025 could put you in a significantly lower tax bracket, which would reduce the tax hit on any distributions you do need to take. The direct rollover to an IRA approach that others have mentioned really is your best bet for preserving maximum flexibility. Once it's in an IRA, you can take distributions as needed for qualified education expenses without the 10% penalty, and you'll have much more control over the timing and amounts. Don't let the stress of the layoff push you into making a hasty decision. Take advantage of all the resources people have mentioned here - SCORE, state displaced worker programs, and even the TAA possibility. Your future financial security is worth taking the time to explore every option.

I really appreciate how thorough and supportive this discussion has been! As the original poster dealing with this layoff situation, I wanted to thank everyone who shared their experiences and insights. After reading through all the advice, I'm planning to take the following approach: 1. Call my 401k plan administrator Monday to understand my specific options and timing for direct rollover vs. distributions 2. Contact my local SCORE chapter to get expert guidance on the financial implications 3. Research Illinois dislocated worker programs and TAA eligibility - these could be game-changers for funding my retraining without touching retirement funds 4. Look into community college partnerships that might offer additional state funding for displaced workers The consensus seems clear that a direct rollover to an IRA is the safest way to preserve my retirement savings while maintaining flexibility for future education expenses. The potential 35% tax hit on a lump sum withdrawal really puts things in perspective - we're talking about losing over $3,000 on my $8,800 balance versus keeping that money growing for my future. I'm also going to follow the advice about timing and see if it makes sense to delay any distributions until 2025 when I might be in a lower tax bracket due to unemployment. This community has been incredibly helpful during a really stressful time. Sometimes the best financial decisions come from taking the time to research all your options rather than reacting out of panic. Thank you all for helping me see the bigger picture and avoid what could have been a very costly mistake!

This has been such an informative discussion! I'm also dealing with this exact scenario - I have a W-2 job and my partner just launched a freelance graphic design business. Based on everything I've read here, the key takeaways seem to be: 1. Don't check box 2c since self-employed spouses don't have W-4 forms 2. Use the IRS withholding estimator to calculate additional withholding for line 4(c) 3. Consider the higher tax burden of self-employment (SE tax on top of income tax) 4. Review and adjust throughout the year as business income changes One question I still have - for those who mentioned consulting with tax professionals, roughly how much did that cost? I'm trying to decide if it's worth the expense for our first year navigating this, or if the free IRS tools and advice from threads like this are sufficient to get us started. We're not dealing with huge income amounts, but I definitely don't want to mess this up! Thanks to everyone who shared their real experiences and numbers - it makes this so much less intimidating when you can see how others have actually handled it.

This is exactly the kind of thorough discussion I needed to see! I'm in a very similar boat - just got married last year and my husband started his own IT consulting business while I have a regular W-2 job. I was completely overwhelmed trying to figure out the W-4 for my new position. The consensus here is super clear and really helpful: definitely don't check box 2c when your spouse is self-employed. That box is only meant for situations where both spouses have employers doing tax withholding. What I'm taking away is that I need to: - Use the IRS withholding estimator to calculate the right additional withholding amount - Put that amount in line 4(c) of my W-4 - Remember to account for self-employment tax, not just income tax - Plan to review this quarterly since his consulting income will probably fluctuate I really appreciate everyone sharing their actual dollar amounts and strategies. It makes this feel so much more manageable when you can see real examples instead of just abstract advice. The hybrid approach several people mentioned (some additional withholding from the W-2 job plus adjusted quarterly estimated payments) sounds like it would work well for our situation too. Going to start with the free IRS tool and see how it goes. Thanks everyone for sharing your experiences - this thread should honestly be pinned somewhere for other people dealing with this same confusion!

Just to add another data point - I was in the exact same situation last year (single, no dependents, one job) and was super confused by all the old advice about claiming 0 or 1. Turns out that's all outdated since the 2020 W-4 redesign! I just filled out Step 1 (Single) and Step 5 (signature) like everyone mentioned, and it worked perfectly. Ended up getting a $62 refund which felt ideal - basically broke even but got a little something back. The new form really is designed to handle simple situations like ours automatically. Don't overthink it - the standard withholding approach everyone's recommending here is spot on!

This thread has been so helpful! I was in the same boat a few months ago - completely confused about the W-4 because everything I found online was talking about the old allowance system. Like everyone else has mentioned, the 2020 redesign really simplified things. For your situation (single, no dependents, one job), you literally just check "Single or Married filing separately" in Step 1, fill out your basic info in Steps 2-3, and sign in Step 5. That's it! I did exactly this and ended up with a $38 refund last year - pretty much perfect. The IRS really did design the new form to automatically withhold the right amount for straightforward situations like ours. If you're still worried about owing, the IRS withholding calculator at irs.gov/W4App is great for double-checking, but honestly the standard withholding should work perfectly for you!

Just to clarify something that hasn't been mentioned: if your employee does the exempt W-4 for one week, they'll need to complete yet another W-4 within 10 days of the start of the next calendar year. The IRS requires a new W-4 annually from anyone claiming exempt status. Also, as others have said, the employee should be aware that if they don't qualify for exempt status (had no tax liability last year AND expect none this year), they could face penalties for underwithholding when they file their taxes.

As someone who's dealt with payroll for over a decade, I'd strongly recommend against the exempt route unless your employee truly qualifies (zero tax liability last year AND this year). Instead, here are some safer alternatives: 1. **Payroll advance** - This is probably your cleanest option. You can advance him pay for future work, withhold taxes normally, then deduct it from his next regular paycheck. 2. **Temporary W-4 adjustment** - He can increase his allowances/deductions on a new W-4 to reduce withholding significantly without going full exempt. Much safer legally. 3. **Emergency loan program** - Consider establishing a small emergency loan fund for employees. Many small businesses do this for situations exactly like this. The key thing to remember is that you're not responsible for verifying his exempt claim, but if he doesn't actually qualify and claims exempt anyway, he could face penalties at tax time. The IRS has been cracking down on improper exempt claims lately. Given he's been with you 3 years and is a good employee, I'd lean toward the payroll advance option if your cash flow can handle it.