401k Rollovers | Rollover to a Roth IRA?

By Mike Rowan, 10/21/2009

eRollover User Question:

Need 401k rollover advice. Should a do a 401k rollover to a Roth IRA? I have money from my old job parked in a 401k. Since I'm only 28, I would like to explore putting this money into a Roth IRA. An Advisor has suggested that I will have to do is roll the 401k over into a traditional self directed IRA, then after I've been taxed on it, it becomes a Roth IRA. Is this correct?

The eRollover Community Answer

If you elect to do a Roth IRA, then you will receive a 1099 for the amount that was rolled over. So the entire amount in the 401k will be taxable as ordinary income in 2009. So if you have $10,000 in your 401k plan, that means you will pay taxes on whatever your tax bracket is in the given year. So you can withdraw it from the ROTH or pay it from other funds and leave the $10,000 invested in the 401k (which would be the ideal to do.)

Remember, 401k rollover to Roth IRA plans still have the positive tax deferment beginning in 2010. You can pay the income tax from the Roth IRA conversion over a number of years, instead of having to pay it all the same tax year.

People have different thoughts regarding whether it is better to roll your money into an traditional rollover IRA or pay the tax now and roll it into a Roth IRA plan. Since you have a long investment horizon, the math probably favors the Roth IRA. However, your actions will determin whether you have the discipline to keep it saved and what return you will actually earn on the money.

The 401k Rollover to Roth IRA thought process

The decision to roll over a 401k or other retirement account into a Roth IRA is typically a good idea when you separate service. You will probably have the option to leave your 401k behind, but rolling it over allows you to avoid higher fees and lack of mutual fund choices while still participating in your old 401k plan. Many people also like to roll over their money so that they can close the chapter on the former employer and have more control over the investment choices.

Planning to rollover your 401k from an employer sponsored 401k plan into a Roth IRA is of great benefit to most investors. Provided that you meet recommended profile, you will pay taxes on previously tax deferred money you invested in your 401k, you will benefit from long term deferment and tax free distributions of a Roth IRA.

Suzie Orman Sounds off on Roth IRA Conversions

For more 401k rollover or Roth IRA rollover Questions, please contact one of our advisors who can help with your 401k and IRA and Planning needs.