IRA Rollover

Archive for August, 2007

Question: Why does Suze Orman say to put your 401k Rollover from previous employer in traditional IRA?

Suze Orman gives advice that people should rollover your previous employment 401k into traditional IRA. Then she says that in 2010 to move this traditional IRA money to a Roth IRA.

Several Questions:
1. What is a “traditional” IRA?
2. What is the logic/benefit to move it to a Roth IRA in 2010?
3. Won’t it get taxed once it is moved to Roth IRA? If not, why not?

Answer: 1. A traditional IRA is a tax-deferred account. You can contribute up to $5,000 per year and reduce your taxable income. In other words, you pay no taxes on the contribution, but it grows tax-free until you withdraw it (at which it is taxed as ordinary income)

2. Some think that our tax rates must go up since they are currently at historic lows. So pay a low tax now and then no taxes later (Roth). So, Bush’s tax cuts go away in 2010 so our taxes will go up in 2011 when Congress doesn’t renew them. Plus, in 2010, even high income people not normally eligible for a Roth will be able to convert.

3. It will be taxed when you move it over. But you will never have to pay taxes on that money again!

Note: you should not do this if you are close to retirement and have a large percentage of employer stock in your 401k.

Roth IRAs in 2010 Part 2