What is a ROTH IRA?

Question

Can I roll over money from a traditional 401k directly to a ROTH IRA?

Answer 1

IRA = Individual Retirement Account. This is a tax-advantaged account that you set up, independent of your employer. A Roth IRA is a specific type of IRA that is contributed to with "after-tax dollars", meaning that you do not get a tax break on your contributions. HOWEVER, the earnings are tax deferred and may then be withdrawn tax-free while in retirement. If you follow the rules of a Roth IRA, you will never have to pay taxes on the earnings. (The above poster is incorrect.) A Roth IRA has potential huge tax savings in the long run.

Sorry, at this time you may not directly roll over monies from a Traditional 401(k) into a Roth IRA. (Congress is working on a bill that, hopefully, will allow this to occur in the next few years. But for now, it is a no-go.)

A traditional 401(k) is contributed to with "before-tax" contributions and therefore cannot be rolled into a Roth IRA. However, you may roll a traditional 401(k) into a Traditional IRA. And then, you may convert a Traditional IRA into a Roth IRA, provided that you pay the taxes that year. So, what you are proposing becomes a two-step process.

Answer 2

A 401K is separate from a Roth IRA - you can not roll money over.

401Ks are through work, and have a matching portion from your employer. That is the major benefit with them.

Roth IRAs have a set maximum amount that you can put into it per year, and you never have to pay taxes on any interest you accrue, which is a *great* benefit. It's good to have both Roth IRA & 401K

Never take money out of your 401K, because you will incur a huge penalty.

I highly suggest starting a Roth and keeping your 401K active through work. If you do, you will be very happy when you reach 59 1/2 years.

Answer 3

Hi, I’m Tricia, a Marketing Associate at Betterment. Betterment.

An IRA is an individual retirement account. It is different from some other retirement accounts because it allows capital gains, dividends and interest to grow tax-free (or tax-deferred). However, there are limits on how much you can contribute and restrictions on when and how much you can take out.

The 2014 limit to an IRA is $5,500 if you’re under 50 ($6,500 for over 50). There are also income restrictions, so make sure you check the IRS on the specific rules.

There are two types of IRAs: traditional and ROTH. Traditional IRAs are tax-deferred. This means your contributions are made pre-tax (meaning you don’t pay tax on what you contribute and it decreases your taxable income). However, when you withdraw from this account in the future, you will be taxed on what you withdraw, including on any growth in the account. A traditional IRA is a good choice if you believe you will be in a lower tax bracket when you retire. This could happen if you plan on withdrawing less than you earn now, or if you move to a location with lower income taxes.

A ROTH IRA is a post-tax contribution account. You contribute your after-tax income. The benefit of a ROTH IRA is that you don’t pay taxes when withdrawing, so your investments truly grow tax-free. This is a good option if you think you’ll be in a higher tax bracket in retirement, or if you plan on moving to a location with higher income taxes.

This is just a quick overview. You should do your own research. Planning for retirement can be confusing as there is a lot to learn. There is a way to lighten the load--automated investing services can help you manage your retirement funds. I have been investing for a while and it’s one of the reasons why I joined Betterment.

I hope this helps!

Answer 4

A ROTH IRA lets you pay taxes on the money up front on your funds, but you still have to pay taxes on the amount you earn on your money. 401k's can be rolled over, yes. Ask you accountant or broker about how to do it, as the check may need to be made out to the account where you want it to go, and you may have time restrictions - if you wait too long you'll have to pay tax.

Answer 5

There is no current tax deduction, but money going into the Roth IRA is taxed at the taxpayer's current marginal tax rate, and will not be taxed at the expected higher future effective tax rate when it comes out of the Roth IRA. There is always risk, however, that retirement savings will be less than anticipated, which would produce a lower tax rate for distributions in retirement. Assuming substantially equivalent tax rates, this is largely a question of age. For example at the age of 20, one is likely to be in a low tax bracket, and if one is already saving for retirement at that age, the income in retirement is quite likely to qualify for a higher rate, but at the age of 55, one may be in peak earning years and likely to be taxed at a higher tax rate, so retirement income would tend to be lower than income at this age and therefore taxed at a lower rate.