401k Ira Conversion

Why would anyone need to do a 401k IRA conversion? That is what will be discussed here today.

In the early to mid 1900s companies rewarded their loyal, long-term employees with retirement income once they reached retirement age of 65. The employees that hadn't managed to stay long term simply didn't receive any retirement income. 401k plans are retirement plans set up through employers to replace the original company paid retirement plan.

A deduction is made from the employee's pay & then contributed into the 401k retirement plan. Some companies will match all or a portion of the employee's contribution thereby increasing the amount available to the employee at the time of retirement. This helps to reduce the expense of the employee on the company & still provide the employee with a retirement plan.

An employee is generally required to stay with the company for a certain number of years before the company's contribution becomes their money. Most companies require a tenure of 10 years before their contribution becomes fully vested to the employee.

What happens when an employee leaves the company before they retire? Some companies have their 401k plan set up to where a new employee may convert their old plan into the new plan. Sometimes this just isn't feasible. With the invention of Individual Retirement Account (IRA) people are allowed to set up their own retirement plan. When leaving a company that has a 401k plan, employees are allowed to convert their 401k into a Traditional or Roth IRA to hold until retirement arrives. This way they don't lose the retirement funds they have saved & they don't have a sudden taxable income situation.

If the 401k is a before tax plan then it should be converted into a like plan also called a Traditional IRA. The Traditional IRA still allows the owner to invest the funds it holds possibly increasing the amount held at retirement tax deferred. Once a distribution is made, the deferred taxes will need to be paid, but at the current tax rate at the time of distribution.

Any part of the 401k that is funded with after tax funds should be a conversion to a Roth IRA. Funds in a Roth IRA plan may also be invested. When a distribution is made it will be tax free as the taxes were paid at the time of the contribution.

Before making any financial transaction, you should discuss your needs & plans with the Financial Consultant employed by the custodian of your retirement plan. Being fully informed increases your chances of making the proper decision of how to handle your investments.