401-k IRA Rollover vs IRA Roth

401(k) IRA Rollover

A 401(k) IRA rollover occurs when you transfer funds from a 401(k) retirement plan, typically sponsored by an employer, into an Individual Retirement Account (IRA). The main reasons for rolling over a 401(k) to an IRA include more control over investment choices, lower fees, and easier management of multiple retirement accounts. There are two types of rollovers:

1. Direct Rollover: The 401(k) funds are transferred directly to the new IRA, and no taxes are withheld.
2. Indirect Rollover: You receive the funds from the 401(k), and you have 60 days to deposit the funds into an IRA. If not completed within this timeframe, taxes and potential penalties apply.

When rolling over to an IRA, you can choose a Traditional IRA (tax-deferred, like a 401(k)) or a Roth IRA (after-tax, offering tax-free withdrawals).

Roth IRA

A Roth IRA is a type of retirement account funded with after-tax dollars, meaning you pay taxes on the money before contributing it. The key features of a Roth IRA are:

• Tax-free growth: Since contributions are made with after-tax dollars, investments grow tax-free.
• Tax-free withdrawals: Once you're 59½ and have had the account for at least five years, withdrawals, including earnings, are tax-free.
• No required minimum distributions (RMDs): Unlike a traditional IRA, you are not required to withdraw money at a certain age.
• Income limits: Roth IRA contributions are limited by income, and there are caps on how much you can contribute annually.

Roth IRA Conversion

If you roll over a 401(k) into a Roth IRA, this is called a Roth conversion. Since a 401(k) is pre-tax money and a Roth IRA is post-tax, you will owe taxes on the amount converted in the year of the rollover. However, future withdrawals in retirement will be tax-free.

Key Differences: Traditional IRA vs. Roth IRA

• Traditional IRA: Contributions are tax-deductible, but withdrawals in retirement are taxed as income.
• Roth IRA: Contributions are not tax-deductible, but withdrawals in retirement are tax-free.