Why Complete a Roth 401k Rollover

Roth 401k Rollover

As you approach the age of retirement, you may consider converting your own company's defined contribution plan (e.g. 401k plan) to an IRA. Your own IRA account typically gives you a wider purchase choice and more control over your hard earned money than a company plan can. But, now, you can turn your 401k directly to a Roth IRA rather to a traditional IRA. Should you opt for the Roth IRA conversion?

A Roth 401k rollover is a tax-advantaged plan. What's unique about the Roth IRA is that both their earnings and any withdrawals you make are tax free. However, money going in to a Roth account must be money on which tax is already paid. So if you perform a Roth 401k Rollover, you'll need to pay that tax on your 401k cash that you have never paid.

Another important facet of a Roth IRA is that -- as owner - there is no requirement to make a minimum required distributions (MRD) as you do with pre-tax retirement plans. This truly makes it the optimal 'tax-free' investment vehicle for expanding wealth.

Once money is converted and tax is paid, you may withdraw your contributions at anytime, even if under age 59 1/2, without penalty. Note that interest can only be withdrawn if it meets a 5-year holding period rule.

Should you do a Roth 401k Rollover?
The major consideration is the tax you must pay on converted funds. It's possible that by including the converted amount in your income, which IRS requires, you drive yourself into a higher marginal tax bracket. For this reason, some people only convert a portion of their pre-tax retirement funds into a Roth IRA each year.

If you're nearing retirement, it is generally advisable to put off a Roth 401k Rollover until you've stopped working so that your 'regular income'- now through pensions and social stability - is much lower. That'll assist in keeping those 'marginal tax rates' attributed to the Roth 401k rollover somewhat lower.

Of course, you can always do what most people do. You can always convert your 401k plan balance right into a traditional IRA. This causes no taxes on the transfer. Of course, you will pay taxes later when you start your required IRA minimum distributions.

Ensure you always do a 401k direct rollover or conversion - from your company plan directly sent to the Roth IRA plan to eradicate any possibility of triggering pointless tax payments or withholding.