How to Move 401k Funds to a Roth IRA

If you are enrolled in a traditional 401k plan or employer based 401k plan, you may be able to look forward to a solid retirement fund. However, some people choose to convert a 401k to a Roth IRA to enjoy all the tax benefits. In order to execute this financial maneuver, you will need to first roll over your 401k into a traditional IRA account. Both of these accounts are not taxed as they are built, and a financial advisor can help to transfer the amounts to a traditional IRA.

There are several pros and cons you need to consider with a Roth conversion. You will need to consider your current marginal income tax rate and the tax rate you expect to reach during retirement so that you are making the best financial decision. With a Roth IRA account, there is no requirement to make minimum distributions and you will be able to pass the investment on to your heirs. If you can anticipate your taxable income during retirement, you may be able to make a more solid financial decision.

Another important thing to consider when you are moving 401k funds to a Roth IRA is the number of years you have before retiring. IF you have a long time until retirement, you will spend more time earning back the taxes you paid at the time of conversion. Consider this factor when you are taking the steps to rollover your account.

The IRS has determined that anyone is allowed to convert their IRA funds to a Roth IRA account without penalty. You will be required to pay income tax on these assets, and will need to work directly with a financial advisor to begin the conversion process. The tax will be based on your marginal tax rate, and you need to make sure all of these transfers are made from one account to the next. It’s best to avoid taking control of these assets personally, or you risk taxation.

If you want to optimize the IRA and Roth IRA conversion process, keep in mind that you don’t have to convert your entire account in a single year. It can be better to spread out the conversion over three to five years. To make the most of your conversion process, check your current year’s taxable income and compare it with next year’s rates, based on your estimated income.

Moving 401k funds to a Roth IRA isn’t the best financial strategy for everyone, but there are some benefits to performing the conversion. Check with your financial advisor to find out if you may be a good candidate for this type of financial strategy.

Tags: 401k, 401k rollover, roth ira

Benefits of Investing in a 401k versus an IRA

Many people open an IRA account in their early twenties in hopes of saving a significant amount of money for their retirement and cashing in on the tax-free benefits. IRA accounts do offer several benefits, but so do 401k plans. Company 401k plans are very similar in scope to traditional IRA accounts because the contributions are invested before any taxes are taken out.

This lowers the account holder’s adjusted gross income, which means the account holder pays less taxes each year without any penalties. However, there are a number of benefits of shifting contributions to a 401k plan. Here’s a close look at the benefits of investing in a 401k when compared to an IRA:

Understanding Types of IRA Accounts

Individual Retirement Accounts (IRAs) are a popular investment strategy for many people. These are individual investment accounts, so there are no company matches involved. The two types of IRA accounts available are Traditional IRA and Roth IRA accounts. The biggest benefit of having a traditional IRA account is that the funds can be deductible and any money invested before taxes will give you an immediate tax break.

Roth IRAs are non-deductible, but the distributions made during retirement are exempt from taxes. This is one of the key reasons why people choose a Roth IRA instead of a traditional IRA. If you are interested in becoming an IRA account holder, you need to meet certain tax and income requirements, and eligibility is based on your overall income, marital status and filing status.

Choosing Between 401k and IRA Accounts

One of the key reasons why people choose a 401k plan is because many employers will be able to match contributions throughout the individual’s career. However, some company 401k plans have several limitations and may end up costing you more in the long run. IRAs are attractive investment accounts for others, because they are individually-owned and controlled. The account holder gets to choose how much they want to invest each month, and where their investments are going. For example, IRA account holders decide whether they want to invest their money in ETFs, stocks, bonds, or other types of funds. Roth IRA plans have the added benefit of allowing for tax-free withdrawals.

If the company you are working for doesn’t offer a company 401k plan or contribution match, your best option may be to open a Roth IRA account. Roth IRA accounts give you a lot of flexibility and allow you to withdraw your money without paying taxes during retirement.

There are a number of benefits of investing in a 401k, instead of a traditional IRA or Roth IRA. However, 401k plans may have some limitations. Talk to your financial advisor or human resources department at your company to discuss the benefits and drawbacks of these accounts, and make the most informed financial decisions for your future.

Tags: 401k advice, 401k plans, retirement plans, roth ira

Retirement Savings for the Self-Employed

Working for yourself comes with a number of benefits: flexible schedules, unlimited income and even the choice of when and where to work. Unfortunately, there are a number of organizational disadvantages to self-employment. These include managing taxes, locating health care and making sure you are saving for retirement. When you work with a large company, your retirement account may be a standard benefit, perhaps even matched by the company. Turning down this institutional benefit does not mean you cannot save for retirement. More importantly, it does not mean you should not save for retirement.

Establishing an IRA

The most common option for retirement savings for the self-employed individual is an IRA, or Independent Retirement Account. Any individual can elect to set up an IRA, and there is not a minimum contribution like there is with some CD offerings. Even if you are investing in CDs, mutual funds or stocks, you should elect to have at least one dedicated retirement account. This helps with personal accountability, offers significant tax advantages, and assures you have some low-risk investments.

Tax Benefits of an IRA

The main reason to elect an IRA over other investments is to deduct the savings from your taxable income on a yearly basis. Depending on the unique structure you choose, you will either realize that benefit today or in the future. In both cases, though, the IRA poses advantages over buying a stock, where you will buy with post-tax dollars and incur taxes on any profits earned.

How much to Contribute to an IRA

You can contribute as much or as little as you would like to an IRA as long as you are within yearly maximums set by the government. These maximums depend on the structure of your IRA and your income. In general, though, these accounts allow you to decide how much you will save each year. It is advisable to save between 3% and 10% of your income each year in a retirement account. If you have more flexible income to save each month, it is best to cap your IRA and save the funds elsewhere. For example, you can purchase a CD or stock with a higher potential return on your investment. This will maximize your potential earnings while still protecting you for retirement needs.

Roth vs. Traditional IRA

In general, a Roth IRA is best for a low-income earner. You are taxed at your current rate with no immediate tax advantages. However, when you withdraw the funds in the future, you will not have to pay taxes at that point or on earnings. The cap for yearly contributions to a Roth IRA is very low, currently $5,000. A traditional IRA has a higher yearly maximum and more tax benefits in the short run. This is best for a high income individual who is already taxed at a fairly high bracket. Contributions are deducted immediately from the taxable income, grow tax free, and are then taxed upon withdrawal. The traditional IRA option may be used in conjunction with the Roth option in order to gain maximum tax benefits.

Tags: independent retirement account, ira, roth ira, saving for retirement, self-employed ira, traditional ira

How to Rollover a Pension

Pension rollovers allow you to change the structure of your current retirement account in order to get a better tax benefit. Not everyone should rollover a pension; this is the best option only for those people who think they can get a better deal with another type of account.

Tax Structure Differences

It is first necessary to quickly understand the different tax structures between the primary pension accounts: 401k, IRA and Roth options. The Roth option is available for both 401k and IRA accounts.

• 401k contributions are made with pre-tax dollars. Then, the funds grow tax free. You have to pay taxes on distributions when you take them later in life. Those distributions are taxed at the rate you are responsible for at the time you get the distribution.
• IRA contributions are made with post-tax dollars. However, the contributions are tax deductible. Then, the funds grow tax free. You are taxed again when you take a distribution.
• Roth options are only taxed once; however, there are much lower limits on Roth options. You contribute post-tax dollars. The funds grow tax free, and they are distributed tax free.

Capitalizing on a Better Tax Structure

To get a better tax structure, you can roll your funds over from your current pension fund into a new form of account. There is no penalty for doing this, but you will need to consider the taxes you may need to pay if you  are switching types of accounts. For example, a Roth option is a post-tax contribution. If you roll over from a 401k to a Roth 401k, you will need to pay taxes on the funds and then they can grow tax free. Roth options are best for individuals currently at a low tax rate who know they will have a higher tax rate in the future. 401k options are best for those who have contribution matches through their employer. IRAs are best for individuals who are setting up their funds independently and want more flexibility than a 401k or RothIRA can offer.

Rolling Over without Penalty

The key to any rollover is assuring you avoid early distribution penalties. Early distribution is any distribution before the minimum age of 59 1/2. The penalty is 10%, which can add up to a lot of money if you are changing over your entire retirement account to another option. In order to avoid this penalty, there are two ways to effectively rollover your structure:

1. Have a pension administrator set up a new account for you prior to taking your funds out of the old account. Then, have the administrator handle the entire process, basically pulling the funds directly from one account and straight into the other. The funds will never touch your hands, and no distribution error is possible.
2. Have the funds from your previous account paid out to you. Then, place those funds into the new account. You have 60 days to complete this transaction. If the funds are not paid in full into the new account within 60 days, then you will face the 10% penalty.

Tags: 401k rollover, can i roll my 401k to a roth ira, ira rollover, pension rollover, roth ira

Traditional versus Roth IRA

Today, the Roth IRA has almost totally eclipsed the traditional IRA option. The Roth IRA is more flexible than the traditional option. Depending on your needs and how much you will contribute annually, though, you may elect the traditional option instead.

Traditional IRA

• Deposits are tax deductible depending on how much you make each year
• You can start withdrawing at 59 1/2 and MUST withdraw at 70 1/2
• Taxes are paid on the earnings from the account when they are withdrawn from the account
• You can purchase a number of investments, not just traditional investments
• There is no income limit, anyone can open a traditional IRA
• Funds withdrawn before 59 1/2 are generally penalized at 10%

Roth IRA

• Contributions are not tax deductible, and the taxes are applied before contribution
• There is no minimum age for distribution
• ALL Earnings and principal in the Roth IRA account are 100% tax free
• You can purchase a number of investments, not just traditional investments
• You are only eligible if you are a single-filer, making less than $95,000 OR if you are joint filing with a spouse and make less than $150,000 combined
• No early withdrawal fees!

Notable Differences

The main difference here is the Traditional IRA is the way contributions are taxed. For a Traditional IRA, you deduct your contribution from your reported income. You will not pay taxes again on that principal amount, but you will have to pay taxes on your gains and interest on those dollars.

With a Roth IRA, you pay your taxes up front. You place funds in after they have been taxed as part of your income, and you do not get to deduct those contributions yearly. However, once the funds are in the account, they grow totally tax free. When you make a withdrawal, you are not taxed on those fees or penalized for withdrawing early.

Which is Best?

There is no single option that is best across the board, but there are some reasons one may be preferable to you.

• First, if you make more than the limit accepted by the Roth IRA program, you will not have an option. You will have to choose a Traditional IRA if you make more than $95,000 and file a single or if you make more than $150,000 as a couple filing jointly.
• If you are in a low income tax bracket at this point, it may be most  beneficial to contribute to a Roth IRA options. This allows you to pay the taxes on your lower income, and then you do not get assessed any taxes no matter your income bracket in the future.
• The Roth IRA contribution limit is very low; you can only contribute $5,000 each year to this plan. If you can afford to put more than this toward retirement, it is a good idea to start doing so as early as possible. A Traditional IRA has much higher limits; a 401K option through your employer will also have a higher limit. You may be able to mix and match your options to contribute the maximum each year.

Tags: 401k maximum contribution, maximum retirement contribution, roth ira, traditional ira

401k to Roth IRA Rollover

If you choose to move money out of a 401K plan, no matter where it is going, you will have to face tax consequences. This is particularly true when you are rolling over into a Roth IRA, because a Roth IRA uses after tax dollars while 401K dollars are not initially taxed.

Avoiding tax penalties

You will have a narrow window of time to avoid these penalties. Once your company sends you a check for the funds in your 401K, you will have to pay taxes on the funds. 20% of your 401K balance will be due in taxes as soon as the check is cut. Instead of choosing this option, it is better to roll your funds into a new 401K or a traditional IRA to avoid tax penalties. Traditional IRA accounts do not assess taxes on contributions prior to their withdrawal. Even if you are planning on keeping the money in a new traditional IRA, you will owe the 20% plus an additional fee of 10% for the early withdrawal.

Setting up a direct rollover is the only way to truly avoid paying the big tax bill and penalties. Instead of receiving a check personally for your 401K funds, you will need to have the check made out to the new retirement account. Your new advisor should be able to provide you with exact instructions to do this. You will have about 2 months to deposit the check into your new account.

Paying taxes to elect a Roth IRA

If you are moving your funds into a Roth IRA, then there is no way to totally avoid the tax penalty. This is because your 401K was based on a deferred tax structure, allowing you to only pay taxes when you withdrew from the account. Your new Roth IRA is different, and it requires you pay the taxes up front. You will only be taxed once on this plan. However, if you have a large lump sum, you should be careful to avoid moving into a higher tax bracket.

If you are considering using funds from your 401K rollover to cover the tax charges, think again. When you do this, you are penalized the 10% fee for an early withdrawal; as of 2009, you cannot begin withdrawing until you are 59 1/2 years of age. Anytime you take funds out of your 401K before that age, you will have to pay the 10% penalty. The good news is: there is no penalty for withdrawing early from your Roth IRA. However, the funds in your Roth IRA are allowed to grow tax-free. You are only taxed once, at the moment you receive the funds as income from your employer, and then they are allowed to continue earning money through investments without counting toward your income each year thereafter. If you take the money out of your Roth account and place them elsewhere, you will not be able to capitalize on the tax advantages of leaving the funds to grow.

Tags: 401k basics, retirement plan taxes, roth ira

Roth IRA vs. 401K: Which is better?

The Roth IRA option has become popular over the previous years owing to some advantages over the 401K retirement plan. However, both options are essentially good choices to save for retirement. Depending on your strategy and your family’s strategy, one option may have advantages over the other.

Key differences

There are a few fundamental differences between these two options. First, a Roth IRA allows individuals to contribute post-tax dollars, meaning you will already be assessed an income tax on the  money you contribute. Once you retire, since the funds have already been taxed, you will not have to pay taxes on your withdrawals. 401K plans are the opposite: no taxes up front, but you pay taxes when you withdraw. Other differences include:

• 401K has higher contribution limit
• 401K has minimum retirement age, Roth does not
• 401K has mandatory withdrawal period, Roth does not
• 401K plans force you to stop contributing when you leave your employer, Roth does not

Scenarios for advantages

Tax bracket changes

Depending on your expected taxes, you will be able to decide which option may be better for you. A young professional with a low income may be taxed at a low rate early in their career and a higher rate later. In this case, you will likely save on taxes if you invest in a Roth IRA. You will likely max out your contributions to a Roth IRA rather quickly, and then you can contribute other funds into a 401K after this point. In the end, you will still save on taxes over time. It is easy to aim for the 401K at a young age because you will be tempted to take the tax-free option. Long-term, however, paying the taxes now makes more sense.  The whole point of investing in a 401K or Roth IRA is to think long-term. These funds will not be used within the next 5 or 10 years, they are yours to use as you leave the workforce and aim to have the retirement you have planned for your entire life. As taxes generally trend in the upward direction each year, paying the taxes now simply makes better long-term sense.

Employer contributions

Your company may offer to match contributions to a 4091K plan up to a certain amount. Investing anything less than that amount is essentially throwing away paychecks each year. For example, if your employer offers a 6% match on your 401K contributions, then you can increase your salary by 6% on any given year just by saving money. If you are making $60,000, that 6% is $3,600 each year in extra funds. This amounts to an extra $75 each week you work, or nearly a half a day’s work. Your employer considers a total compensation package when determining your salary each year. This includes benefits like medical care and retirement plans. When you elect to forego one of these benefits, you are willingly lowering your compensation. Your employer will not offer to simply give you this money in cash each year; you will have to completely turn the funds down if you do not place the maximum contribution in your 401K.

Tags: 401k basics, retirement plan taxes, roth ira