IRA Rollover

Archive for September, 2006

Question: 401k Rollover to Traditional IRA or Roth IRA? Which is better?

I have 10K in my 401K. I tend to roll it over to Roth, taxed once and never again, since only 4000 per year contribution is allowed, I can only rollover 10K this year 4000 and then next year 5000 and the rest, bit by bit? is that right? And I have to rolloever to a rollover IRA first right? Sincce I can only contribute 4000 or 5000 per year, the growth is not as large as if I have a larger lump sum compare to traditional. Unless I know by the time I retire, I am in a lower tax bracket… then traditional is good? I am confused, or maybe either turns out to be the same? I know traditional is tax deductable, Roth you can take the contributions out penalty free after 5 years. I read motley fool example and they said Roth is a bit better, but now I’m not sure. let’s just say, I can pay the tax now if I move it to Roth, but still, I can’t roll it all at once, correct?

Answer: you do not have to rollover to a traditional from a 401k… your can lump-sum it ALL out.

Check with your brokerage, but I do believe the initial funding is not limited to 4k$ a year.

Remember that you are paying $1000 in penalties for early disbursal.. and whatever your income tax rate is on $10K. If you do it all at one time, you are paying a high hit on the penalty and potentially a high hit on the taxes.

Were I you… I’d follow the path you are suggesting. Take it out in small bites and eat the penalties / pay the taxes that way.

If you are young, and absent a matching 401k, the Roth IS your wisest move….If you have a MATCHING 401k you should fund it first and keep the money where it is… as the “match” is an INSTANT ROI that cost you NOTHING…

Kaoma – Lambada