Should I Roll Over My 401(k) to a Roth IRA?

The Wickham team is here to help you.

Changing jobs offers you the opportunity to make changes to your retirement savings plan. If you are looking for more control over your own investments, a 401(k) rollover to an IRA is a good choice. But which type of IRA is best for you? Read below to learn more about the Roth IRA, how it compares to a traditional IRA and what factors determine when the Roth IRA is the right fit for you.

Roth IRA vs Traditional IRA

One of the key differences between a Roth IRA and a traditional IRA is when taxes are paid. For traditional IRAs, contributions are pre-tax and taxes are assessed at the time of disbursement. Contributions to Roth IRAs, on the other hand, are deposited after tax. Because you pay tax before investing the funds in a Roth IRA, you do not pay tax later on the disbursements.

Another difference is the required minimum distribution (RMD). The RMD with a traditional IRA starts at age 70½, whereas Roth IRAs have no RMD. That means you can continue to let your savings grow even after you are 70½. In fact, you can keep making contributions to your Roth IRA after you reach 70½.

Both traditional IRAs and Roth IRAs may be subject to early withdrawal penalties if funds are accessed before the age of 59½. However, under certain circumstances, funds in a Roth IRA can be withdrawn without any penalties.

Roth IRAs do require that you meet certain conditions. Unlike traditional IRAs, the Internal Revenue Service (IRS) has set income limits on those who qualify for Roth IRAs. If your income exceeds the limit, you may have no choice but to opt for a traditional IRA.

Is a Roth IRA Right for Me?

When deciding between a traditional IRA and a Roth IRA, you should take into consideration your projected financial position at the time of retirement. If you anticipate being in a lower tax bracket after retirement, making tax-deferred contributions into a traditional IRA and paying tax at the time of disbursement may be the best option. If you expect your retirement savings to push you into a higher tax bracket after you retire, paying taxes upfront and avoiding tax at the time of disbursement may be best for you.

Roth IRAs are also great for those who have other retirement savings and may not need the funds invested in an IRA right away. Because Roth IRAs have no RMD, you can set the money aside and let your investment grow until you need to access the funds. Or you can make use of your Roth IRA as a wealth transfer instrument and potentially pass along the tax benefits to your beneficiaries.

If you are changing jobs, or considering a career move, our team at Wickham Financial & Insurance Services can help you decide how to manage your retirement investments. Roth IRAs and traditional IRAs are great tools for retirement savings and both types of IRAs put investment decisions in your control. If you have decided to roll over your 401(k) from your previous employer to an IRA, or if you are still trying to decide, our advisors will help you evaluate your current financial position and assist you with making financial projections for your future. This is a critical step when deciding between a Roth IRA and a traditional IRA. Our team is ready to guide you through the process and help you make the best retirement savings decisions for you.

Any information provided has been prepared from sources believed to be reliable but is not guaranteed, does not represent all available data necessary for making investment decisions and is for informational purposes only.