Transferring your 401(k) to a Roth IRA can be a great way to maximize your retirement savings. Not only can you transfer contributions and earnings from the Roth 401(k) directly to a Roth IRA tax-free, but you also have the potential to benefit from more investment options than were available in your former employer's 401(k) plan. Additionally, transferring your money to an IRA can reduce the administrative and management fees you've been paying, potentially affecting the return on your investment over time. The funds offered by the 401(k) plan may be more expensive than usual for your asset class. By transferring your 401(k) to a traditional IRA, you'll gain access to more investment options compared to an employer-sponsored 401(k) plan and the flexibility to align the account with your overall investment management strategy.
You'll also continue to defer taxes on the account as you did with the 401(k) plan. If you're changing jobs, it's important to consider transferring any account to their new employer's plan or an IRA (SIMPLE or SEP). The main reason for becoming a Roth is the assumption that your tax rate will be higher when you retire. If you decide to transfer your 401(k) plan to an IRA, you typically have only 60 days from the date you received it to do so. If your savings in a Roth IRA represent only 5% or 10% of all your retirement savings, they may not be enough to justify the loss of the tax deferral. The easiest and most secure way to transfer your 401(k) plan to an IRA is through a direct transfer from the financial institution that manages your 401(k) plan to the one where you will maintain your IRA.
Using the money from your Roth IRA to pay taxes has been shown to worsen the situation of workers in the long term. The strategy of converting a 401(k) into a Roth IRA is appealing to many investors because of its unique benefits. In the event that the market experiences a significant decline, converting a traditional IRA that has fallen by, say, 20% or more, into a Roth will generate a substantially lower amount of tax due at the time of conversion. If you think you'll be in a higher tax bracket or that tax rates will generally be higher when you start to need your IRA money, switching to a Roth from a traditional account and taking on the tax impact now might be in your best interest. If you're under 59 and a half years old, it's also much easier to withdraw funds from a Roth IRA than from a traditional one. Anyone can convert a 401(k) into a Roth IRA once a year; there are no income limits like those that exist with regular contributions to a Roth IRA.
