In today’s job market, people don’t stay with one company for their whole working lives. A person might have several 401K plans going at once. You may have one left over from your old job, and be contributing to a new one at your current job. What are the benefits of moving your 401K to A Roth IRA?
What is the difference between a Roth IRA and a regular IRA? The Roth IRA was established in 1997 under the Taxpayer Relief Act. The main difference between a Roth and other IRAs is that there are less withdrawal restrictions and requirements. Any transaction made within the Roth IRA including dividends, interest, and capital gains will not be taxed. Roth IRAs have a “seasoning” period that is currently five years. After this period you will be able to withdrawal any funds converted from your 401K into your Roth IRA without penalty. If you or your spouse dies, and two Roth IRAs exist, you or your spouse will be able to combine the two IRAs without penalty. Also assets in a Roth IRA can be passed onto heirs.
The Roth IRA is not without its disadvantages. Unlike other IRAs contributions to a Roth IRA are not tax deductible. The higher tax bracket you find yourself in, the more disadvantages there are to a Roth IRA. It is often the case that a person’s income is lower after they retire placing them in a lower tax bracket. If they are making withdrawals from a traditional IRA they will be taxed a lower rate than if they paid the taxes on the money when they contributed to the IRA. In a Roth IRA, you pay taxes when you contribute, quite possibly at a higher rate than you would have paid if you would have paid them when you withdrew the funds. Also, if you die too soon after retirement or you don’t reach retirement, you will not get the full tax benefits from using a Roth. Visit www.rothira.com. This is a very informative site on all the advantages of having a Roth IRA. The site is kept current with all of the new laws and rules governing a Roth IRA. There are some great articles on the advantages of a Roth IRA and how to set one up. If you are planning on converting your 401K to a Roth IRA you have to compare the two and weigh the benefits for your own personal situation. For example 401K plans are employer controlled. An individual sets up a Roth IRA. While a 401K plan has forced distribution starting at age 70, a Roth IRA does not. It can simply be passed on to an heir.
At any moment after the account is “seasoned”, a person can withdrawal all of his or her funds from a Roth IRA. This is not the case with a 401K. Another advantage for the Roth IRA is that if you plan on using any of the money for a home down payment, medical expenses, or educational expenses, there is no penalty for withdrawing money from the Roth. On the other hand, there is a 10% penalty associated with a 401K for the same things.
There are lots of online sites that will do a 401K to Roth IRA conversion for you for a fee of course. Here are a few of the top sites if you are planning on making this conversion. Once again, you must arm yourself with all the knowledge available and make the right decision for you and your family.
www.fidelity.com
www.vanguard.com
www.troweprice.com