Pros and Cons of Rolling over 401ks to Roth Iras

Rolling over a 401(k) into an Roth IRA is an important decision that can affect your long-term retirement goals. For many people in America today, a 401(k) is the only type of employer sponsored retirement plan they will ever have. Rolling over a 401(k) plan after changing jobs is a decision that will affect the retirement decisions you make. A 401(k) is a tax deferred account that is offered only through an employer. Employees can choose how much to contribute to their account, and often a portion of this amount is matched by the employer.

Employees can also choose from an array of investment options for their money. After leaving a job, an employee has to choose to either leave their 401(k) plan intact, or roll fit over to another account. If the employee cashes out the 401(k), they are subject to losing money to penalties and taxes. Leaving the money in the 401(k), however, also comes with consequences. By simply doing nothing, a person will often have to deal with their old employer in order to manage their funds. If their former employer goes out of business, gaining access to their account can become more difficult, although the account can never disappear. For these reasons, many people choose to roll over their account into an IRA. There are two types of IRAs, traditional and Roth.

A traditional IRA uses money that has not been taxed, grows tax-free, but withdrawals are taxed. A Roth IRA takes in after tax money, grows tax- free, but withdrawals are not taxed. Because 401(k) is similar to a traditional Ira, many people choose to do a simple roll over of their 401(k) to a traditional IRA. Rolling over a 401(k) to a Roth IRA can be a better option for some people. The main disadvantage to doing this is the fact that taxes have to be paid on any money coming from the 401(k) before it gets deposited into the Roth IRA. If an individual expects their tax base will be higher after they retire however, then paying the taxes now may make more sense.

Persons who have a low income and/or can claim a lot of deductions at the present time would want to pay taxes now so they will not have a greater tax burden later. Roth IRAs also have an annual contribution limit of $5000. For larger 401(k) accounts, this means a rollover can take several years. Rolling over a 401(k) to a Roth IRA will provide an individual with the ability to withdrawal money tax-free during their retirement. Individuals are also allowed to withdrawal their contributions at any time without paying a penalty. This gives a person the flexibility to use their money to pay other bills before they retire, or the ability to retire early.