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401(k) Options After Leaving Your Job
 
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IRA Rollover

You may transfer your 401(k) to an existing or new individual retirement account (also called an individual retirement arrangement or just IRA for short), instead of another 401(k).

If you have not yet landed a new job or your new employer does not offer a 401(k) plan, an IRA rollover may be the way to go, if you can't or prefer not to keep your 401(k) where it is.

When transferring your assets to an IRA, you may use the direct rollover method to avoid the automatic 20% tax. But IRAs are otherwise different from 401(k) plans in a few ways. For example, depending on your income, your post-rollover contributions to an IRA might not be tax deductible, if you also contribute to another qualified retirement plan in the same tax year. But if you invest in a traditional IRA, your earnings are tax deferred just like a 401(k). Many banks, brokerages and other financial institutions offer traditional, Roth and other IRAs, each with varying types of investments and benefits.

Roth IRAs are different animals from the traditional. But they've become popular since the Tax Relief Act of 1997 authorized them, because of the benefits they offer. So, they're worth mentioning. For example, one of the benefits is that you won't have to pay taxes on your withdrawals, once you reach age 59 . But since contributions to a Roth are not tax deductible, one of the negatives, the IRS likely won't allow you to rollover your 401(k) directly into a Roth. Instead, you may roll it over into a traditional IRA, and then maybe covert that to a Roth. However, the IRS conversion rules are complex to keep loopholes closed, and you might have to pay taxes on the conversion if the IRS lets you take that route. Still, many investors and advisors think that the Roth IRA is the greatest thing going, ever since workers became responsible for managing their own pensions. So, even if you can't rollover or convert other retirement accounts to a Roth, you might consider it as an additional investment strategy.

The bottom line is, it's a matter of weighing one option against another for your particular situation, now and for the future. To help you choose the best one for you, make sure you understand the differences among:

There are many more resources to help you decide, listed under Elsewhere on the Web in the sidebar. But again, it might be a good idea to see an independent financial or tax counselor too.

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This article is just a guide and not intended as financial or tax advice. Neither the author nor publisher are engaged in rendering such services. Because U.S. tax laws and regulations are ever-changing, neither the author nor publisher guarantee the accuracy of this article. Please see a professional for financial or tax advice.

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