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Why Rollover Your 401k?
The first inclination that many individuals have when leaving their job is to cash in the funds from their 401k retirement portfolio. However this decision is typically the worst choice to make, considering the harsh penalties from both taxes and the financial institutions themselves. Instead, migrating your 401k assets into a tradition or Roth IRA can produce long-term financial results with the minimal amount of penalties. Comparing that to the alternative, the chances are if you are under the age of 59 1/2 years old, it is practically guaranteed that you will get penalized for your withdrawal..
If you are planning on rolling over your 401k, the next step is to decide where you will be migrating it to. You have three main options:
1. A new 401(k) Program
2. A Traditional IRA
3. A Roth IRA
Here are the Tax implications of all three:
401k - Contributions are deposited as “tax deferred” and then taxed at normal income bracket for distributions.
Traditional IRA - Contributed money is at first post tax money. However, contributions are tax deductible which reduce your tax basis for that tax year. Then, distributions are taxed at the normal income for distributions. Tax deductibility is limited by MAGI and participation in pension or 401k.
Roth IRA - Contributions are post tax money and no taxes have to be paid under normal distributions
Here are the Contribution Limits for all three:
401k - $16.5k/yr for under 50, $22k/yr for 50 and over in 2009; limits are a total of traditional 401(k) and Roth 401(k) contributions. Employee and employer combined contributions must be lesser of 100% of employee’s salary or $46k.
Traditional IRA - $5k/yr for age 49 or below; $6k/yr for age 50 or above in 2009; limits are total for traditional IRA and Roth IRA contributions combined.
Roth IRA - $5k/yr for age 49 or below; $6k/yr for age 50 or above in 2009; limits are total for traditional IRA and Roth IRA contributions combined.
So before you make any decision, make sure you review your options with a financial professional.
Watch This Short Video to Learn More About 401k Roth IRA Conversions.
Watch This Short Video to Learn More About 401k Roth IRA Conversions.