Ira Rollover Into Roth
August 15th, 2010
Question: Should I rollover into Traditional or Roth IRA?
When I worked with the California school district, a retirement fund (401K) was set up for me. Now I have close to $1000 that I want to rollover into an IRA. I always hear that Roth IRA’s are “better” but my boyfriend told me I should rollover this fund into a traditional IRA instead, and I honestly didn’t understand his answer. Can someone please tell me if he is right. What would be the better option here?
Answer: If you rollover your 401(k) plan into a Roth IRA you will have to pay taxes on all your contributions and capital gains. However, when you pull your money out of the Roth at Retirement time you will not have to pay any taxes on your withdrawals. If you rollover your 401(k) into a traditional IRA you will not have to pay any taxes up front, however after you make withdrawals in retirement you will have to pay taxes on everything you withdraw.
The bottomline is taxes, pay them now with the Roth rollover or pay them later with a Traditional. Given the small amount that you have to rollover I would recommend that you take the Roth route it will not affect your tax liability that much anyhow, and hopefully when you retire it will be significantly more and tax free.
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Tags: 401k, ira rollover, ira rollover into roth, retirement, rollover, roth, Roth IRA