401k Assets and Roth IRAs

When you're planning for retirement, having a number of different investment strategies in your portfolio will help you prepare for any contingency. In our fast paced world, most professionals will change jobs more than once in their career. If you have a 401k or another employer sponsored retirement account and you decide to switch jobs, you have the option to roll over the funds in your 401k to a traditional or a Roth IRA. Investors who want to take advantage of the tax benefits that a Roth IRA provides may decide to convert their 401k assets to a no fee Roth account.

401k Versus Roth IRA

Building a diverse investment portfolio will give you more financial flexibility during your working life while providing greater stability in retirement. With a 401k plan, you may contribute a percentage of your income to a tax deferred account that is sponsored by your employer. As an added bonus, your employer may match a percentage of your contributions, maximizing the value of your account.

With a 401k, the funds you contribute are taken out of your earnings before taxes, and the interest and dividends you earn on the account grow at a tax free rate. When you retire and you begin collecting distributions, you must pay taxes on these funds. With a Roth IRA, contributions are made after taxes and are not tax deductible. However, when you reach the age of 59 1/2 or meet other eligibility requirements, you may withdraw distributions tax free.

If you have the opportunity to contribute to a 401k, you can build a significant retirement savings through a combination of your contributions, earned interest, dividends from the fund's investments and your employer's contributions. As of 2012, you may contribute up to $17,000 dollars to a 401k each year, an increase of $500 from 2011. [1] By comparison, you may contribute $5,000 to a Roth IRA each year, or $6,000 per year if you are age 50 or older. [2] As long as your income does not exceed the maximum limits established by the IRS for your tax filing status, you may contribute to both a 401k and a Roth IRA.

Rolling Over a 401k

If you decide to roll over your 401k assets to a Roth IRA, work with your plan administrator to make sure you meet the necessary requirements. In the past, investors whose income exceeded $100,000 per year were not allowed to roll over 401k assets to a Roth IRA. As of 2010, this restriction no longer applies, and investors with higher income may qualify for the rollover. If you have been restricted from opening a Roth IRA because your income exceeds the maximum limit, a 401k rollover may allow you to avoid this restriction.

Because contributions to a 401k are made before taxes and Roth IRA contributions come from post tax income, you will be required to pay taxes on your 401k assets when you roll them over to a Roth IRA. You have the option to roll over all or part of the assets in your 401k account, but you will be taxed on the amount that you roll over. Taxes on the rollover amount may be paid over one year or two years.

Including 401k assets and Roth IRAs in your investment strategy will diversify your portfolio and enhance your earning potential. Take advantage of the high contribution limits and employer contributions of a 401k, while enjoying the tax free benefits of a Roth IRA. If you have a career change, consider rolling over all or part of your 401k assets to a flexible Roth IRA.

http://www.irs.gov/retirement/participant/article/0,,id=151786,00.html 01/19/2012

http://www.irs.gov/retirement/participant/article/0,,id=188232,00.html 01/19/2012

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