IRA Rollover

Archive for June, 2009

Question: Pro vs Cons-Converting a 401K to a Roth IRA?

I am 37, no longer work for the company. 401K contributions are $2500 greater than current value due to economic recession (my 401 became a 201K)

I am doing a direct to direct rollover and just want to know if Roth is better than traditional as there is not any gains (only a loss) at this point. I’d like someone with real tax law knowledge/investment experience that can back up there response.

Answer: First of all, you can only do a 401k to Roth transfer if the company plan document allows it. Not all do.

Secondly, any money you roll into the Roth will be taxable income in the year you roll it (since you have never paid tax on it, and Roths are funded with after-tax money).

So it depends on a) your tax bracket: is it advantageous or harmful to pay the tax now vs. later? when will you be in the highest tax bracket? If your income down the road will be higher, do it now. If not, transfer it to a regular IRA and wait.

and b) if your joint AGI will be greater than $100,000 in 2009, you can’t do it anyway. Have to wait till 2010 for income limits to be lifted.

If you can do the rollover, be sure to do a trustee to trustee transfer or they are mandated to withhold 20% for income taxes (they make an estimated payment for you).

Roth is better longterm because you can eventually take the money out tax-free. However, I’m not holding my breath on this because I grew up outside Washington, DC and watched Congress change its mind every year. If they’re looking for tax money in 10-20 years, watch out!

Roth vs. Tradtional 401K — Which Should I Choose