Taxing Retirement

I recently changed jobs and won’t be able to invest in my new company’s 401(k) until January 2008. Can I rollover my 401(k) with my former employer into a Roth IRA or must I invest in a traditional IRA? –B. Logan Alpharetta, GA
By the time you finish reading this response, the federal tax laws may have changed. OK, that’s an exaggeration, but you need to be mindful of the various tax law changes that may impact retirement planning.

Here, you need to understand the differences between a traditional IRA and a Roth IRA: The primary advantage of a traditional IRA is that contributions to the account are often tax deductible. Distributions from the account are taxed as ordinary income. The appeal of a Roth IRA is that, though contributions are made on an after-tax basis, withdrawals from the account can be made tax-free.

With that as background, the short answer to your question is that currently a direct rollover of a 401(k) into a Roth account is not permitted–it’s first necessary to transfer the funds to a traditional IRA and then convert that into a Roth. There are tax consequences to such a conversion. But, I repeat, things change. Starting in 2008, some 401(k) participants will be able to move their funds directly into a Roth IRA. Before you make a final decision, I recommend you take a look at the IRA FAQ page on the IRS Website,, and IRS Publication 590, Individual Retirement Arrangements.

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