Most places of employment will offer a variety of retirement plans you can choose to make use of. Two commonly asked questions are whether a Roth 401(k) is the same as a Roth IRA retirement account and is either one better than a traditional 401(k) plan.  While there are significant differences, any type of IRA & retirement plan investing is a great idea; for the past 10 plus years the average American actually had a negative savings rate!

The Roth IRA

A Roth IRA and a Roth 401(k) are two very different savings instruments. Both have the same concept however. Basically, you make contributions to plan for retirement. There are no tax deductions for these contributions. Yet, upon your retirement, you can withdraw your contributions and additional earnings tax-free. While it would be wonderful to have a simple answer to these common questions, one type is not necessarily better than the other. It will greatly depend on your personal preferences and circumstances. The right choice for you will depend on your specific situation and expectations.

The Traditional 401(k)

With a traditional 401(k), the employee will contribute a specified percentage of their salary to a plan that is employer-sponsored. Many companies will make contributions to your account, and some companies will even offer a match of up to 100% of your contributions. No contribution that is made to the traditional 401(k) is counted as taxable income. All of the gains that are accumulated in the account are tax-deferred. Upon withdrawal, the amount is taxed as if it were ordinary income. The traditional 401(k) is similar to a traditional IRA account and account owners will have to begin taking withdrawals at age 70 1/2.

Roth 401(k)

When dealing with a Roth 401(k), the contributions that are made by the employer are kept separate. These contributions will receive the same tax treatment as a traditional 401(k).

A Roth IRA does not have a withdrawal requirement. You will never be required to make mandatory withdrawals from the account. Roth 401(k) accounts do have a withdrawal rule, and owners will be required to begin withdrawing when they reach 70 1/2. One way to avoid the mandatory withdrawal rule is to rollover the Roth 401(k) into a Roth IRA retirement account. Keep in mind that Roth 401(k) accounts are available to every worker, while Roth IRAs have an income restriction.

The Roth 401(k) plan has a maximum contribution limit. In 2009, the limit is $16,500. However, there is a $5,500 catch-up contribution that is allowed for workers who are over the age of 50. Combined, employees can contribute up to $22,000 per year into their account.

Contribution Limits: Roth IRA & 401(k)

IRAs have a very significant difference from a 401(k). With an IRA retirement account, the contribution limits are lower. This is because these accounts are not sponsored by your employer. For 2009, Roth IRA contribution limits are set at $5,000. Employees are allotted an additional $1,000 for catch-up, totaling $6,000 for the year if you are over 50. It is possible to have more than one type of retirement account. If you have an IRA and a 401(k), you can contribute the maximum amount to both accounts. Now, the question remains, what’s better, a 401(k) or a Roth IRA?

Choosing Roth 401(k) or Roth IRA

An analysis conducted by William Urban from Bingham, Osborn and Scarborough, indicates that the Roth 401(k) plan “might be the better choice for more people than commonly understood.”

The popular belief is that a Roth 401(k) makes more sense, especially if you are planning to be in a higher tax bracket upon retirement. The analysis showed that if your tax bracket falls in retirement years, the accumulation in the Roth might make that the better choice. This is usually the case if employees can afford to contribute the maximum amount allowed. Many times, younger workers are in the lower tax brackets. This minimizes the immediate tax benefits of the traditional 401(k), making the Roth fund a better choice. 

Regardless of your decision, going with any tax advantaged savings account is critical to save for retirement. More and more people file for bankruptcy because they did not have a large enough savings when a financial emergency occurred such as a sickness, loss of a job, or death in the family.

While 401(k) plans have some good points, they also have a down side compared to a self directed IRA. It is suggested that anyone who wants to rollover an old 401(k) change over to a self directed IRA. There are many reasons for this and this article will help explain why it is better to roll over the 401(k) to a self directed IRA. One of the biggest reasons for changing the 401(k) over to an IRA, in the first place, is to allow for greater variety in investment choices. If changing over to a traditional IRA, a big part of the benefit is lost, as traditional types of IRA still have many limits on the type of assets you can invest in. The person rolling their 401(k) over should choose a self directed IRA, as it allows for full control of your money.

All IRAs are better than a 401(k) because 401(k)s are bound to your employer and their investment company. This means the company sets things up for the greatest benefit for itself and not for the greatest benefit of the person who holds the account. A self directed IRA is the best way to go as this type of account has a custodian that guides you through all the pitfalls and the rules, but does not control what happens in the account. When the account holder is not bound by other interests, there is no limit to the investments that can benefit the account holder. In conclusion, a self directed IRA is simply the best choice for rolling over a 401(k).

1. You get more investment choices and opportunity to better diversify.

2. Expenses may be lowered.

3. You can consolidate with other money which makes administration easier.

4. It is oftentimes easier to get if you need for an emergency.

5. Can covert to a Roth IRA if you qualify and if a Roth is appropriate.

6. You no longer have to worry about the financial stability, urge to merge or sale of your ex-company … and this is very important if your plan contains their stock. If your plan contains company stock investigate the tax advantages of rolling the stock out of the plan, paying the taxes on your basis and holding the stock outside the plan OR selling it immediately to get capital gains treatment. You’ll want to consult with a tax professional before acting.

7. Eliminates the chance of lump-sum distribution to beneficiaries in case of your death.

8. Avoids spousal consent if you want to change beneficiaries – of course this could be a disadvantage if you’re the dependent spouse.

9. Better manage the tax liability of your surviving spouse and/or heirs.

10 Ability to convert your money into a lifetime income you can’t outlive.

Here are some disadvantages of moving your 401(k) from an ex-employer:

1. Some states do not give the same creditor protection to IRAs that they do to 401(k)s. If this is important, check your state statutes.

2. If you have life insurance with your ex-employer as part of the 401(k) plan, you may lose it if you transfer the money.

3. If you plan to retire after age 55 but before age 59-1/2 you may have better lump-sum access to your 401(k) than to an IRA.

4. If you have a loan outstanding from your 401(k), it will need to be repaid prior to rolling over into an IRA.

5. You may have access to an investment inside your ex-employer’s 401(k) that will be lost if you roll over into an IRA, e.g., ex-employer stock that you think will continue to outperform other alternatives you could have.

6. Loss of spousal consent to change a beneficiary.

The roll over of your 401(k) plan at an ex-employer to an IRA makes a great deal of sense in the majority of cases; however, there could be circumstances that might make it better to stay put. Rolling over your pension money from an ex-employer should be undertaken with the advice and counsel of a financial professional that specializes in retirement planning. The process of assessing your options is fairly straightforward and, if action is needed, rolling over is easy and painless. If you are staying put because of loyalty to your lifelong employer, your sentiments are to be complemented; however, when it comes to your retirement savings, your first loyalty must be to you and your family. Most retirement planning professional agree that “money in employer-sponsored plans should go with you when you the leave the company”.

Amidst the hassles of moving, finding the kids a new school, and settling in to your new position and community, it’s easy to lose sight of the finish lineretirement. Your 401(k) is probably your most important investment in regards to retirement savings. Don’t let it get lost in the shuffle when a change in your professional life comes along.

When switching jobs, there are three things you can do with your existing 401(k): leave it where it is, roll it over into an account with your new employer, or move the money into an IRA. Cashing out the plan is not an option. We repeat: DO NOT CASH OUT YOUR 401(K)! It’ll badly set back your retirement savings plan. You’ll be hit with income taxes plus a penalty of 10 percent if you’re under age 59½. What’s more, you’ll miss out on tax-deferred savings.

Leave It Where It Is

There’s nothing wrong with keeping the cash where it is if you’re happy with the plan at your old job. If you’re confident you can keep track of it, if you’ve got a nice chunk of change in there, or if the plan your new employer is offering is less than appetizing – leave it be. Just make sure you tell your old HR department about your plan to leave it behind. If there is less than $5,000 in the account, they have the right to dump you.

Roll It Over

Most financial professionals agree it’s a good idea to have all of your 401(k) dollars under one roof. It’ll work harder for you as one asset and you can dip into it (as a loan) if a financial emergency arises. If you do decide to rollover, make sure to jump through all of the (relatively minor) hoops and fill out the appropriate paperwork with both your old company and your new employer.

Drop It Into An IRA

If your new gig doesn’t offer a 401(k) program, or if you dig the investment freedom that comes with an IRA, go this route. You’ll have much more of a choice when it comes to investing your retirement dollars, as thousands of mutual funds will be at your behest instead of a dozen or so 401(k) options. Be cautious when going this road, though. 401(k)s are generally a smidgen more protected from those evil creditors than are IRAs. It’s a minor detail now, but if you ever declare bankruptcy or get sued, it could become a much bigger issue.

Whichever route you choose, know the rules. Way back when, details were cloudy on the IRS-friendly way to transfer funds from one 401(k) to another account. Investors had to put 401(k) funds into a “conduit” IRA if they believed they would move the funds into another 401(k) account in the future. The money couldn’t be mixed with other retirement savings and new contributions were also verboten. Sound confusing? It was.

But no longer. Mix all you want. You can transfer an old 401(k) account into an IRA while still making payments, move it from a new IRA into a Roth IRA, or shift the funds directly into a new 401(k) account. The choice is yours.

However, make certain to complete a “trustee-to-trustee transfer” when you relocate your funds. This basically means you’re directing your new employer to schedule the details of the transaction with your old company. This way, you can avoid your old job writing you a check for your existing 401(k) balance, wherein you have 60 days to drop it into a new account. This is not a headache you want. When you go this direction, your previous company will hold back 20 percent of your money for income tax purposes.

The next time you file your taxes, you’ll get the money back, but meanwhile you’ll have to make up the difference yourself within the 60 days. No thanks. Even more frightening: if you don’t roll over the entire balance within 60 days, the taxman cometh. The IRS sees that deficit as a taxable withdrawal and enforces regular income taxes along with a 10 percent penalty.

Special situations can always arise. Even if you think you have a complete grasp of all IRA rules and penalties, there are always special circumstances that could change things. Many times, these situations can be complex and confusing.

A common situation that arises is a job change. A lot of people do not know what to do with their current 401(k), 403(b), or other qualified retirement plans when they change jobs. You may have to consolidate accounts if you have multiple IRAs or you may have to roll your company plan over into your IRA. (A Rollover is just jargon for moving the money and assets from one account to another.) Most companies give you enough time to make these decisions, so there is typically no need to be concerned, but you should definitely call your administrator because this has to be evaluated on a case by case basis; every company has different protocols and procedures – some companies will not make you move the money at all.

Inherited IRA retirement accounts can be very confusing. If you lose a loved one and inherit their IRA account, you will be placed in one of these special circumstances. Many questions will arise and they are addressed below.

Can I Have Multiple IRA Accounts?

There are no limits placed on the number of IRA accounts an individual may hold. However, regardless of the number of accounts, the contribution limits will be combined or based on an aggregate amount contributed to all of your accounts. The amount must remain lower than the allowed IRA contribution limits for the year. Some people believe that by having two IRA accounts, they can save twice as much. This is not the case. There are also fees that are associated with multiple IRA retirement accounts so it tends to make the most sense to consolidate them into one account.

Can I Combine My IRA Accounts?

You are never required to combine retirement accounts, but it is always an option. It will definitely make things simpler. There will be a lower chance of error when making contributions. There will also be a reduced amount of paperwork involved in managing the multiple IRAs. Sometimes, there are pitfalls that can become present when rolling over IRA retirement accounts, so it is always best to discuss your options with a financial advisor before making any final decisions or call Estate Street Partners.

If you are thinking about conversions and considering what is the best IRA, it is possible to convert your Traditional IRA to a Roth IRA. You must meet certain qualifications which are addressed at: Should I convert to a Roth IRA?  Since everyone had different financial situations, make sure to consult your financial advisor or Estate Street Partnerse to make sure a conversion will be in your best interest.

What Are My Options if I Inherit an IRA?

Inherited IRAs can be difficult to understand. If you do inherit an IRA, the responsibility is now completely yours. All earnings and future distributions belong to you, as well as any taxes that are to be paid on the account.

Some accounts will allow you to close the IRA and take a lump sum pay-out. If you do this, you will owe taxes on the entire amount that is in the account at the time it is closed. The best thing to do with an inherited IRA is roll it over to your personal Roth IRA if possible or into a Roth on Roids™ account because the estate and income taxes will likely have already been paid by the estate.

Rollovers are not always an option. It will depend on the specific circumstances regarding the inherited account and your personal plans for retirement.

- Here Are 3 Tips to Make Your Transition Easier -

* Tip #1: Are you happy with the amount of money your investment is earning in your 401(k)?
If you answer yes, then leave your 401(k) where it is.
If you answer no, then it’s time to look into moving your 401(k) to a self-directed IRA.

* Tip #2: Keep your rollover non-taxable.
If you are rolling your 401(k) over to an IRA, then you’ll definitely want to make sure you take the proper steps to make sure the rollover is non-taxable. One way to ensure the rollover is non-taxable is to do a “trustee to trustee” transfer. This means you tell your employer to directly transfer the investments in your 401(k) to your IRA.

If your employer happens to write you a check instead of doing a direct transfer, then you must deposit the entire check amount into your IRA within 60 days. BUT, if your employer withholds taxes from the check (which is often required when a check is written), the withholding is treated as a distribution to you as well – even though that money went to the IRS and not you! To avoid tax on the withholding, you must write your own check for the amount of the withholding and deposit it into your IRA within 60 days. You can then claim the withholding when you file your tax return for that year.

* Tip #3: Have a plan ready for your IRA
One of the key parts of every wealth strategy I create is velocity. Simply put, velocity means to constantly keep your money moving into investments so your money is constantly working for you. This is why you need to have a plan ready for your IRA so as soon as your 401(k) money hits your IRA, you are ready to put it to work!

One of the questions I get asked regularly about investing in IRAs is this:

Can Your IRA Invest in Real Estate?
The short answer is yes, but it’s important to first consider how it impacts your wealth strategy and your tax strategy. The important question to ask is SHOULD your IRA invest in real estate?