I have about $22K to invest into my retirement as a rollover. Would it be better to add it to my current IRA or start a new ROTH?
Hi Jason,
Thank you for your question!
Is your 22K from your traditional 401k or roth 401k?
If you have a traditional 401k, you would want to roll over the money into a traditionall IRA (or a rollover IRA).
If you have a Roth 401k, you would want to roll over the money into your roth IRA.
Please keep in mind that if you currently have a traditional 401k, then the money in your traditional 401k MUST be rolled over into your traditional IRA to avoid any tax consequences. This is because money in your traditional 401k is before-taxed money. Therefore it must be rolled into a before-taxed account (traditional IRA).
If you roll over your traditional 401k into your roth IRA, the full amount will be considered taxable income for the tax year.
Please consult and verify this information with your CPA and your 401k vendor.
Good luck!
Thank you so much for your response! The money is actually from a pension from a previous employer. It’s worth $28K lump sum if I take it now (before taxes). I’m wondering if it makes sense to take that lump sum and start a new Roth IRA and pay the taxes (ending up at $22K initial Roth investment - and does not increase my tax bracket) or just put that full $28K in my traditional IRA and pay taxes in retirement. I could be splitting hairs here, but the idea of a ROTH and tax free retirement sounds nice.
Hi Jason,
Thank you for the clarification!
Generally speaking, it would make more sense to roll over your pension into your Traditional IRA to avoid paying taxes upfront, and it would give you more flexibility to mitigate taxes in the future.
The money in your Traditional IRA will still grow tax-free.
When you retire, you can control how much you want to withdraw each year from your Traditional IRA, which gives you the ability to control how much taxable income you want to trigger during your retirement.
If your income ends up taking a dip in the future and moves you to a lower tax bracket, you can always do a Roth conversion from your Traditional IRA to your Roth IRA in the future.
You can even do a Roth conversion when you are retired!
However, if you believe this tax year is the lowest tax bracket you will ever be in for the rest of your life (including retirement), then it may make sense to roll over your lump sum to your Roth IRA now.
Otherwise, it may be more beneficial to roll over your lump sum to your Traditional IRA and defer paying taxes.
I hope this helps!