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 ½. 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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