Determining The Potential Tax Burden Of Your 401k Roth Rollover

The start of a new year is upon us, making this the perfect time to re-evaluate your current financial position and your retirement savings goals. If you haven't given much thought to Roth investment accounts before, consider them now as part of your New Year's savings resolutions. Even though the 401k Roth rollover may leave you with a preliminary tax problem, it brings a number of major future benefits for most retirees.

One of the major rationales behind opting for a 401k to Roth IRA rollover is that you can eliminate your future tax burden on IRA withdrawals as Roth IRA withdrawals (when done properly) are exempt from Roth IRA Taxes. In case you expect that at the time of your retirement you will be categorized in a higher tax bracket or if you believe that the overall potential tax rates will increase, the advantage of no taxes on IRA withdrawals is significant.

Other than the tax benefits, 401k Roth rollovers have other advantages as well. You escape the 401k withdrawals that are required for 401k account, as well as conventional IRAs. This allows you to grow your money tax-free, as long as you are able to do it.

You may also find that you are able to pass more of your Roth retirement savings on to your children and other family members without being taxed, depending on your state's tax laws.

However, while Roth retirement accounts are a great savings tool for most people, moving money into them via a 401k Roth rollover is not a welcome process. Traditional retirement accounts are funded with pre-tax contributions, meaning that taxes haven't yet been paid on these funds (and won't be until you enter retirement). Therefore, the funds you move into a Roth retirement account by 401k Roth rollover will be considered as general income and will incur Roth IRA taxes on the conversion. The tax issue may be further compounded because the income on the conversion is added to your regular income and may cause your overall tax percentage to increase.

To consider whether or not the money that you roll over into a Roth account is enough to shift you to a higher tax bracket, do the calculations using software at most any of the mutual fund company web sites, Turbotax or ask a tax accountant for assistance. If there will be a negative impact making for onerous Roth IRA taxes in the current year, pursue a sequence of fractional conversions over many years. This may alleviate being pushed into a higher tax bracket.

Note that the previous rule permitting only those with adjusted gross income of under $100,000 to complete a 401k to Roth rollover was repealed and such conversion is available to anyone.