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When you leave your job, you are faced with choices of what to do with your 401K with the former employer. We will discuss a rollover to an IRA account, specifically a Roth IRA account in this article.
There are two types of rollovers, direct and indirect rollover. The former is a direct transfer of fund from the plan provider to an IRA and the latter involves the employee taking a withdrawal from the plan and depositing it into an IRA.
Before you initiate a 401k rollover to Roth IRA, call the plan provider of your former employer to find out every detail about the procedure and the paperwork. It is essential that the rollover occurs within 60 days or else the fund becomes taxable and no longer qualified for a rollover.
Before you decide whether you want to do a rollover to a Roth IRA, you may want to consider advantages and disadvantages of such rollover:
Advantages
1. Funds in a Roth IRA account grows tax-free, not tax-deferred, meaning you never have to pay taxes on them again
2. There is no required minimum distribution (RMD) even if the account holder reaches the age of 70 ½.
3. One can continue to contribute to a Roth IRA even after 70 ½ years old.
4. Since contribution to a Roth IRA is after-tax, withdrawals are tax free.
Disadvantages
1. Individual Roth IRA may not have the access to former plan-specific investment options and/or pricing.
2. One cannot take a loan out of an IRA account.
3. An IRA account may not be protected from creditors in case of bankruptcy.
4. A conversion from a 401K to a Roth IRA account may affect the taxable income of the account holder in that year. This increase in income may adversely affect his children’s eligibility for financial aids, his premium for Medicaid and taxes for Social Securities.
