401k Rollover to Roth IRA Explained
September 15th, 2010 Filed under: ira investing — Investing Author
The process of doing a 401k rollover to Roth IRA does involve an extra step that is not present with the move to a traditional IRA, or Individual Retirement Account. The difference here is tax based. If you have a 401k and are leaving your employer or wish to put this retirement fund into an account that you have more ability to manage, then the Individual Retirement Account may be the right choice for you. You get to pick which investment broker you wish to work with as well as any type of specifics on the funds.
Roth IRA or a Traditional IRA?
One of the decisions you will need to make is whether the Roth IRA is the right option for you or if the traditional IRA is a better choice. The difference here has to do with taxes.
•In a traditional individual retirement account, you will not pay taxes on the income you invest when you put the funds into the account. Rather, the income taxes are charged later on when you remove the funds from the account during your retirement. It is likely that your income tax rate will be lower at that point and you may pay less.
•In the Roth IRA, on the other hand, you pay taxes before the money is invested in the retirement account. Then, later when you withdraw the funds, you do not pay taxes on the funds at that point.
How does this relate to the 401k rollover you are trying to manage? In short, a 401k retirement account does not have any type of taxation taken out of the funds when the funds are added to the account. This is a pre tax investment, similar to that of the traditional IRA. If you wish to convert your 401k to a Roth, you will need to pay income taxes on the balance at the time of moving the funds. This could cost you a sizable amount of your balance, but after that point, the funds grow without any taxation on them.
There are many circumstances that could play a role in this type of account transition. You should consult your tax professional or financial planner to help you to make the right decision for your needs. The 401k rollover to Roth IRA may be the right decision for your circumstances and your long term goals within your retirement planning, but do consider the options.
Julie-Ann Amos is a professional writer who writes on many topics, including on 401k rollover to roth info. For more info, check out the 401k roll over info blog.
One Response to “401k Rollover to Roth IRA Explained”
By Working Mommy of 2 on Sep 15, 2010 | Reply
In “The Gospel of Roth- The Good News About Roth IRA Conversions ad How They Can Make You Money” by John Bledsoe it clearly states in the book that NO ANALYSIS is needed and that eveyone should convert to a Roth IRA regardless of income. There is NO risk! The IRS is giving us a year to recharacterize or “undo” the conversion. This book gives the ins and outs for Roth IRAS! It really helped answer all my questions.