The Benefits of Converting from 401k to a Roth IRA

Mickey | Financial Services | Friday, December 17th, 2010

If you are deciding on the issue of Roth IRA VS 401K, you have to zero in the pros and cons of each retirement plan. The purpose of 401k plans is for employers to provide their employees with a retirement plan as part of their benefit package. The contribution for this type of plan is normally taken from the employee’s wage. 401k plans are perfect if you plan to stay with your company for a long time. However, they are not anymore manageable if you are going to switch jobs or retire. This is the reason why there is the option to have the 401k’s funds transferred to another individual retirement account.

The Pension Protection Act of 2006 made some changes on the rules on IRAs and other savings plans. One of the rules was to allow the change of 401k, a corporate retirement plan directly to Roth IRA. The highlight of this amendment is that the direct rollover of Roth IRA will not incur a 20 percent withholding.

Roth IRA provides several advantages on the investors. One obvious benefit is that the funds can increase in a tax free environment. Another benefit is that the distribution which refers to the earnings made by the investments can be strategically withdrawn in the span of one’s life.

Roth IRA’s withdrawal of distributions is subject to 10 percent penalty if such a fund is taken within the five years after the conversion and if the investor’s age is below 59 years and a half. Roth is therefore, a solid retirement plan intended for those who want to spend the distribution during their retirement years. If you plan to take distributions shortly after converting the funds, then this retirement plan is not for you.

The 401k rollover to Roth IRA requires careful evaluation. It is very important to understand all options before making that final decision.  401k plans can also be rolled over to Traditional IRA and other investment accounts.


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