401(k) or a Roth IRA?

By: Steven Muller

When deciding on a retirement plan, a simple 401(k) plan is an obvious choice for many. In most cases, individuals who are just starting to plan for retirement take up this option because it makes the most sense. The money you earn in this plan is tax-deferred. However the money you thus received is then minus the taxes you have to pay on that. What if one can receive all that money and let it grow in the meantime completely tax-free? Then converting to a Roth IRA is the option that should be chosen.

A Roth IRA allows a person’s retirement fund to grow without the burden of taxes. First off, one must find out if they are eligible to convert their 401(k) into a Roth IRA. The requirements include that your modified adjusted gross income must be less than $100,000. In addition, your filing status must not be married, filing separately. This $100,000 limit does not include any income from your decision to convert to a Roth IRA. The major drawback from converting is that the person will now have to pay right away the taxes on what is currently in their 401(k). So when deciding to do this one must ask themselves if they believe that the benefit from your money growing tax-free will be greater than the cost of having to pay the taxes due on conversion. Also they must make sure that they have the money to able to pay these taxes right away.

As you can see a Roth IRA is a great way to enhance one’s retirement plan if the situation is correct. If you have the ability to convert and handle the short-term loses in doing so, the long-term gains will be well worth it.



Sources:
http://retireplan.about.com/od/iras/a/convert.htm
http://financialplan.about.com/lw/Business-Finance/Personal-finance/Roth-IRAs-Offer-Flexibility-and-Tax-Free-Returns.htm
http://stocks.about.com/od/investing101/a/IRA031305.htm