A client is considering what do do with her 401k from an old job/ She must move the money and she does not need it at this time but wants to save it for her eventual retirement even though she is only like 25. Being as she is not self employed and does not have another 401k or other employer plan at this time I believe but would like confirmation that her choices are the Traditional and Roth IRAs. My second question is, we know she will take a tax hit if she goes with a Roth but will there be the ten percent penalty for a premature distribution?
-
-
Conversion to a Roth IRA is exempted from the 10% premature distribution penalty.Originally posted by erchess View PostTaxes after all are the dues that we pay for the privileges of membership in an organized society. - FDR -
Yes, she can roll the funds into either a traditional or a Roth IRA, and if she does, the usual 10% "early withdrawal" penalty will not apply. Rolling into a Roth IRA, however, means the entire distribution from her 401(k) plan will be taxable. Why pay that tax now ... perhaps several decades earlier than necessary?
We've all read the arguments pro and con about this, and I believe that in most cases it's wiser to avoid voluntarily paying tax on lump-sum distributions needlessly early. The only time a rollover into a Roth IRA makes good sense is when the taxpayer is in the 0% tax bracket (i.e. the taxable amount would result in zero tax), possibly when it would be taxed at 10% and maybe when it would land in the 15% federal tax bracket. The state's income tax, if applicable, should also be considered when weighing this decision.Roland Slugg
"I do what I can."Comment
Comment