Roll over your 401(k) to a Roth IRA?

Roll over your 401(k) to a Roth IRA?

Investing in your retirement

Earlier this month, we wrote about rolling over your 401(k) into a traditional IRA when you leave your job. But what if you want to roll into a Roth IRA?

Roth IRAs offer a smart tax break that you should know about for your retirement plan. They’re funded with after-tax income (so you don’t get any sort of tax break up-front), but when you retire withdrawals are completely tax-free.

In other words, you’re getting a a tax-free gift from the government on your earnings when you retire.

Traditional IRAs, meanwhile, are generally funded with pre-tax income. When you retire, you’ll pay ordinary income tax on those withdrawals.

Roths are great, but to roll over your 401k funds into a Roth, you’ve gotta ante up to Uncle Sam. Remember, Roths are funded with after-tax money. So if your 401(k) has been growing nice and plump with your pre-tax contributions, to shift those funds into a Roth, you will have to pay taxes on that money.

Also, including that extra income on your tax return could disqualify you from certain income-based tax breaks, like the child tax credit, warns Mark Steber, chief tax officer for Jackson Hewitt Tax Service.

Bottom line? Roths rock, and can save you in taxes in the long-term. But before rolling into one, chat with a tax pro.