Rollover From 401k To Roth Ira Account
Rollover to Roth IRA is the most interesting option among the many choices available to investors when transferring funds out of 401k
. This type of transfer has only been made widely available. There is anticipated prevalence of such transfers to Roth IRA with the advent of new legislations.
Up until 2008, the transfer of an existing 401k was often too complicated for most people to consider and pursue. Although there strategies that would eventually get your 401k money to Roth, it was difficult to say the least. Before the end of 2008, however, legislators provided a means for you to rollover your 401k directly into a Roth account. This paved the way for a much simpler process that did not need any of the lengthy steps to transfer from one account to the other.
Now before you go rushing to rollover your account into Roth IRA, you have to understand some basic information about the transfer. Roth IRA is a unique account that if used correctly and creatively, may gain you some great diversity for your retirement income and savings. But you also have to consider certain immediate drawbacks in transferring to this type of plan.
Created by the Taxpayer Relief Act, the Roth Individual Retirement Arrangement was named after its chief sponsor, William Roth, the late senator from Delaware. It was basically designed after the traditional IRA account but with some twists. Traditional IRA provides for pre-taxed contributions and consequent taxable distributions; In contrast the Roth IRA plans allow after-tax contributions into the account and offer tax-free distributions, instead. The funds continue to grow income tax-free. This unique tax structure is one of the principal advantages of the Roth IRA, for a comparatively easy investment in securities, including common stock and mutual funds, real estate, notes and other multiple types of investments.
Since Roth provides tax-free distributions, there are very specific rules for rolling over from 401k. Of course, Uncle Sam wants to make sure he gets paid in the process. In short, do not expect that your already tax-free 401k dollars will make it out of the account still totally tax-free.
When you rollover your 401k funds to Roth, the rollover is considered a form of distributions because of the nature of the transfer; thus you will face an immediate tax liability. In effect, a portion of your retirement plan is taxed in the current year.
If you are thinking of a rollover from your 401k to a Roth IRA account, make sure that you are ready to take on the consequential tax load that the transfer may create. This move may not make sense to a lot of people but it can be a powerful strategy to provide for future retirement income and eventually a larger legacy to your heirs.
by: Dallas Hart
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