401k rollover

Of the many options available to investors when transferring funds out of a 401k plan, the rollover to a Roth IRA can be one of the most interesting. Only recently has this type of transfer even been widely available. With new legislation, transfers to Roth IRAs will become more and more prevalent.

Up until 2008, transferring an existing 401k account into a Roth IRA was difficult at best. Although there were strategies that would eventually get your money into a Roth account, the transfer was often too complicated for most people to pursue.

In 2008, lawmakers have provided a way for you to rollover your 401k directly into a Roth IRA account. There is no longer any need for the lengthy steps to transfer from account to account. A simple transfer is all that it takes in most situations.

Before you rush to rollover your account into a Roth IRA account, it is good to understand some of the basics of the transfer. A Roth IRA is a unique account, and is one that if used correctly and creatively, can add great diversity to your retirement income and savings. On the other hand, there are certain immediate disadvantages to transferring to this type of plan.

The Roth Individual Retirement Arrangement was created by the Taxpayer Relief Act of 1997 and was named after its chief sponsor, William Roth, the late senator from Delaware. The Roth was designed with a twist to the traditional IRA account. Rather than providing pre-tax contributions into the account and taxable distributions out of it, the Roth IRA functions opposite of the traditional account.

Roth IRA plans allow after-tax contributions into the account and offer tax-free distributions out of it. Similar to a traditional IRA, funds in the this type of IRA account continue to grow income tax-free.

This unique tax structure is one of the primary advantages of the Roth IRA. Comparatively, it is able to invest in securities, including common stock and mutual funds, real estate, notes, and multiple other types of investments.

Because the Roth provides tax-free distributions, the rules for rolling over from a 401k plan are specific. Uncle Sam wants to make sure that he gets paid in the process. The IRS has made sure that your already tax-free 401k dollars do not make it out of the account completely tax-free.

When you rollover your funds to a Roth, you will face an immediate tax liability. Because of the nature of the transfer, the rollover is considered a form of distributions out of your 401k. As such, the taxable portion of your retirement plan is taxed in the current year.

When you rollover your 401k to a Roth IRA be sure that you are ready to take on the tax burden the transfer creates. Though this strategy does not make sense for all people, it can be a powerful way to provide future income for your retirement and eventually your heirs.

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There’re many benefits of 401k retirement plans but the most beautiful benefit is when your employer matches your contributions to the plans to a certain point. The matching boils down to your employer’s discretion and financial capability. The match could be 25 cents, 50 cents or more to the dollar or dollar for dollar.

This means that each time you contribute, your employer adds money, for free! Free money for your retirement! Greater chance for you to retire in style and in comfort……

So matching fund from employer is the STAR benefit of 401k retirement plans.

What other benefits can you get from 401k retirement plans, besides this?

Let’s see:

All your contributions are on a pre-tax basis. By deferring money to your 401k before taxes, you not only avoid paying taxes now, but you reduce the amount of taxable income that the government can take

When you withdraw from your 401k, you’ll pay federal and state income taxes. But if you relocate to another state when you retire, like Florida or another state which doesn’t have a state income tax, you save money

In case of emergency, you can withdraw money from your 401k account. However, if you want to withdraw from your account penalty free, you should wait until age 59½. If you withdraw before age 59½, you’ll have to pay a 10% penalty

In some cases, you may be able to borrow money from the account, penalty free. However, if you leave your job or are laid off, before paying back the loan, you may be required to pay the full amount at termination. It’s always good for you to check first before borrowing money from your 401k account

If you turn 50 years old or older during the calendar year (January 1-December 31) and you’re already making the maximum contribution, you can nonetheless make an additional “catch-up” contribution, to boost your savings

Any gains from dividends or investment earnings growth are tax-deferred. This can mean many years of tax deferred growth. Tax deferral can have a powerful impact over time to increase your funds for retirement

Flexibility – you can decide how much you would like to save and you can increase, decrease or even stop your contributions. If you change job, you can rollover your existing 401k savings into an IRA (Individual Retirement Account) or you can choose to transfer it to your new employer’s 401k