Roth or Traditional IRA – Retirement Decisions
Besides working on 5 For Friends, if I could do anything, I would want to be a financial advisor to help people with these types of difficult decisions. I am no different than the average person and I have to go through the same process when trying to determine what the best course of action for my retirement accounts are for the future. I have several rollover IRA’s that are out there and generally I am pretty good at managing their performance. I do have one that is outstanding — meaning I need to move it and I am considering the almighty important question — to Roth or not to Roth?
Since their inception Roth IRA’s for the right situation have been the better option. For me it is different because if I were to convert this 401(k) to a Roth IRA, it would create a taxable event, which increases your taxable income, thus increasing your tax rate and possibly the amount that I would owe the IRS. Since I am exhausted from paying taxes, I am leery of this route. Generally, the Roth is a great option because allows your money to grow tax deferred and as you approach retirement, you will be able to continue to lower your tax base and enjoy your after tax dollars in your golden years. I guess that’s the dream they try to sell you on. In my case for this rogue 401(k) that I have, I will roll it over to a traditional and continue to look for ways to manage my tax situation. When I say manage, I am all for paying the taxes that I owe, but not a dollar more.
I feel like we all have retirement questions as it pertains to our retirement strategy and what our 401(k), TSP, 403(b) and other sponsored plans should be doing for us, however we have to do a better job of understanding these investment vehicles for ourselves or hire someone that does it professionally. Chances are you going to change jobs multiple times over your career and you have options as it relates to your account. You can:
- Leave the money in your former employer’s plan;
- Roll your money over to the new employer’s plan, if the plan accepts transfers;
- Roll over the money into a 401(k); or
- Take the cash value out of your account
I hate (I know it’s a strong word) option #4. You should never do that! When the economy tanked, more people cashed out of their employer sponsored plans creating a 10% penalty plus state and federal taxes being deducted. On top of that you lose any of the positive compounding interest that worked for you. According to USA Today, sadly, 66% of Blacks cashed out of their plans in 2010 compared to 57% of Hispanics, 37% of Whites and 34% of Asians. This should be a last resort depending on circumstances. I am not an expert, but understanding how money works is a passion of mine and I like sharing my thoughts with others.
Until next time….