- Age (i.e. time between now & retirement)
- Your income & expenses.
- Tax bracket now & after retirement.
- Returns i.e. earnings on your contributions.
Typically in long run Roth IRA beats Traditional IRA.
Assuming you get 10% average return on your Roth IRA investment, it is better to go for Roth IRA. Longer the money in Roth IRA, more time for earnings to grow. So eventually your earnings (gains/interest) will be far more than your actual contribution. And real gem of Roth IRA is, earnings are TAX FREE after 59 1/2 yrs!!
How can I rollover 401k to Roth IRA directly?
No, you can NOT convert from 401k (any employer retirement plan) account to Roth IRA directly!
But indirectly you can achieve this rollover in following two steps!
- If you are eligible to rollover 401k, then rollover to Rollover IRA which is kind of Traditional IRA.
- Then if you are eligible for conversion, then convert the Rollover(Traditional) IRA to Roth IRA.
Yes, contributions and max limits of Roth IRA and SIMPLE IRA are separate and independent of each other. Contribution made towards SIMPLE IRA does not count towards Roth IRA contribution.
With SIMPLE IRA, the maximum amount that an employee can contribute is $10,000 in 2006 ($10,500 in 2007).
According to IRS, the contribution limit for Roth IRAs generally depends on whether contributions are made only to Roth IRAs or to both traditional IRAs and Roth IRAs.
IRS link for SIMPLE IRA contribution:
There is some hope for higher income bracket. Normally in this case not much can be done, but because of recent legislation that everybody Will be able to convert their IRAs to ROTH IRA in 2010 regardless of their income!
So you can contribute to non-deductible Traditional IRA from today and then convert it into ROTH IRA in 2010. Of course you have to pay tax on your your earnings (not contribution which you already paid) accumulated till that time.
This is the best chance for high income earner to get into ROTH IRA in 2010!
Risk: If congress changes the law related to this again, you have to reanalyze the situation.
Yes you can and this is called as Rollover of Roth IRA.
You can withdraw, tax free, all or part of the assets from one Roth IRA if you contribute them within 60 days to another Roth IRA.
A rollover from a Roth IRA to an employer retirement plan is not allowed.
A rollover from a designated Roth account can only be made to another designated Roth account or to a Roth IRA.
For related IRS link, Click Here.
Yes, you can make a contribution to a SEP-IRA and a Roth IRA. See Chapter 2 of Publication 590, Individual Retirement Arrangements (IRAs), for the requirements to contribute to a SEP and a Roth IRA. However, your SEP IRA contribution and Roth IRA contribution can not be made to the same IRA.
- Publication 590, Individual Retirement Arrangements (IRAs)
- Publication 560, Retirement Plans for Small Business
- Tax Topic 451, Individual Retirement Arrangements (IRAs)
Here is the order of so called conventional wisdom regarding retirement accounts:
- First always invest in 401k upto the matching amount by your employer.
- Then if eligible put maximum upto $4000 in Roth IRA (year 2006/2007).
- Then if you still want to invest in retirement, put remaining in 401k (max. is $15000 for year 2006)
Because of 401k contribution, contribution to Traditional IRA is not tax deductible.
You need to withdraw excess contribution and earnings (from that contribution) from Roth IRA before the due date of income tax return. Otherwise a 6% excise tax applies to any excess contribution to a Roth IRA . Earnings on this excess contribution considered as taxable income.
Amounts contributed for the tax year to your Roth IRAs (other than amounts properly and timely rolled over from a Roth IRA or properly converted from a Traditional IRA, as described later) that are more than your contribution limit for the year, plus
Any excess contributions for the preceding year, reduced by the total of:
Any distributions out of your Roth IRA s for the year, plus
Your contribution limit for the year minus your contributions to all your IRAs for the year.
Applying excess contributions. If contributions to your Roth IRA for a year were more than the limit, you can apply the excess contribution in one year to a later year if the contributions for that later year are less than the maximum allowed for that year.
Yes! You can contribute to both Roth and Traditional IRAs same time provided total of contributions in both IRAs is not more than maximum contribution allowed for any IRA ($4000).
Maximum contribution allowed for any IRA (Traditional or Roth) is $4000 for year 2006/2007 (age < 50 yrs).
If you contribute $2000 in Traditional IRA, then you can contribute $2000 more in Roth IRA same time that year (2006 or 2007).
Note: For age >= 50 years, additional $1000 can be contributed in IRA.
Rollover - A distribution from a traditional IRA can be contributed to a Roth IRA within 60 days after distribution.
Same trustee transfer - As with the trustee-to-trustee transfer, the financial institution holding the traditional IRA assets will provide directions on how to transfer those assets to a Roth IRA. In this case, things should be simpler because the transfer occurs within the same financial institution.
A conversion results in taxation of any untaxed amounts in the traditional IRA. Also, the conversion is reported on Form 8606, Nondeductible IRAs.
Absolutely yes! This is one of the key gem of Roth IRA in contrast with Traditional IRA and 401k. Contribution money in Roth IRA can be taken out ANYTIME tax free and NO penalty! Here any time means, you contribute today and next month you can withdraw that money tax free and penalty free. And there is no tax because tax is alrady paid on contribution money (after tax money).
In short, contribution money in Roth IRA acts as liquid money without any penalty (same as banks savings account).
But withdrwal of any earnings (gain or interest) on your contributions will result in penalty!
One can contribute maximum $4000 to Roth IRA for year 2006/2007 if age is less than 50. For age equal or greater than 50 maximum allowed is $5000.