Roth IRA and 401(k) plans both have some advantages and disadvantages to consider when deciding on a retirement plan. Rolling over your 401(k) plan into a Roth IRA account depends on each individual situation.
The plans differ in the ways they are taxed. Contributions made to a 401(k) plans aren't taxed during accumulation, but the money is taxed when you begin taking out funds.
When you have a Roth IRA account, the contributions usually come from your own checking or similar account and you pay taxes while making contributions. Unlike a 401(k), which is done through an employer, a Roth IRA account is your own individual retirement savings plan. When you take the money out, it is tax-free.
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A 401(k) rollover into a Roth IRA account makes sense if you expect to be in a higher tax bracket when you retire. You can take money out of the Roth without being taxed on the distributions.
There are several reasons that could put you in a higher tax bracket during retirement. For instance, during your working years, you may have been able to take tax deductions to lower taxable income. These issues include deductions for dependents or mortgage payments, deductions you generally would not have during or nearing retirement.
You stop making contributions to a 401(k) plan in retirement and you might have further income from other savings investments and Social Security. In these cases, rolling over to a Roth IRA would be beneficial.
Roth IRAs also provide more flexibility. You are required to start withdrawing from a 401(k) at age 70 and a half, but there are no such requirements for a Roth IRA. You can withdraw as much as you want or leave some money there for children and grandchildren.
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Some people, however, might find themselves in a lower tax bracket after retirement. Most or all of their income will be coming from 401(k) distributions. The employer matches contributions individuals make to the plan, so that's more money being invested over the years. Eventually, the money taken out is tax-free.
The 401(k) plans provide security with protection against creditors or lawsuits. Whether you are still young or nearing retirement, 401(k) plans also allow taking out a loan on your account.
Holding onto your 401(k) account would make sense in those situations. Besides, you can still consider converting to an individual Roth IRA account whenever you choose. Talking with a financial planner will help you decide on a 401(k) rollover into a Roth IRA.
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