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Mailbag Monday: Rolling Over a 401(k)

mailbagmondayMy 54-year-old husband has a 401(k) account with his previous company with approximately $300,000. It has been doing well, so should he leave it there or transfer it? For tax purposes, should we buy Roth IRAs in each of our names?

— Joanne

Hi Joanne, your husband probably wants to roll that 401(k) over to an IRA, which will give him more control over the money and possibly better — or at least more — investment options.  He could roll it into a Roth IRA, but keep in mind you’ll have to pay taxes on any pre-tax assets you roll over, which is likely that entire $300,000 balance.  I’d advise that you only do that if you have the money to pay the taxes out-of-pocket — in other words, don’t use funds from the 401(k) to cover the taxes.  Once converted, you can pull that money out in retirement tax free, which is a nice perk.

The other option? You could roll the 401(k) into an IRA, then each open a Roth and make contributions there. If you don’t have income of your own, you can contribute as a spouse with your husband’s income. The 2013 contribution limits are $5,500 per person, but you can contribute an extra $1,000 if you are over age 50. That means collectively you could put $13,000 a year into Roth accounts, assuming you are both over age 50.  It won’t give you any tax savings now — a Roth’s contributions are made with after tax dollars, so you don’t get a tax deduction — but again, you can pull the funds out in retirement tax free, which can be even better.

You don’t mention if your husband has a 401(k) at his new company, but if he does, he should contribute enough to that account to grab any matching dollars, then contribute to the Roth, then go back to the 401(k) with anything else.

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