401k Rollover To Roth Ira
MAKING THE 401K ROLLOVER TO ROTH IRA
A 401k rollover to Roth IRA is one of the options you have take if you need to move your 401k from one investment firm to another or move it because you have left your current employer. However, there are some very specific 401k rollover rules you need to follow before making this move. Further, there are tax implications here.
The 401k is a type of retirement plan in which the funds put into the account are pre-taxed. That means you did not pay taxes on those funds before they were placed into your retirement account. The benefit here is that the funds grow tax free throughout your lifetime and are only taxed when you begin to withdraw them, usually when you have a much lower income tax rate.
On the other hand, the Roth IRA is a type of retirement account where the funds are taxed before they are placed into your retirement account. Then, the funds grow tax free over the course of your life and you are not taxed again when you withdraw them. This is an important difference because when you wish to rollover the 401k to a Roth IRA, you will need to pay taxes on the money within the 401k before establishing the Roth IRA. That will be a significant chunk of money in most cases.
Many people like the benefit of the Roth IRA and therefore they will make this move. However, you may want to consider how long you have until you retire and if it makes sense financially to do the 401k rollover to Roth IRA.
