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Traditional vs. Roth IRAs
radroadkill
MDRegistered User regular
MDRegistered User regular
I am not savvy with these terms so I'm going for help here.
The past three years I've worked for a company that had an employee saving's plan in the form of a 401k. I ended my employment with the company in late July to move to California and get married; now that the move and marriage is done with and we've taken care of all our paperwork, my name change, and setting me up with Navy Federal Credit Union (NFCU) I've got my employee savings plan to transfer over from its current home in Wachovia to an IRA in NFCU.
The lady who set up my acocunt at NFCU gave me two forms: one for a Traditional IRA and one for a Roth IRA, depending on which I was going to do. (Or was it needed to do?) I just called a representative from Wachovia to update my information through them and to ask if it mattered which I did and didn't get an answer, other than to talk to NFCU. (Which isn't open yet.)
So what I want to know is: what's the difference between these two? Am I free to use whichever I'd like or is it dependent on my new institute?
The past three years I've worked for a company that had an employee saving's plan in the form of a 401k. I ended my employment with the company in late July to move to California and get married; now that the move and marriage is done with and we've taken care of all our paperwork, my name change, and setting me up with Navy Federal Credit Union (NFCU) I've got my employee savings plan to transfer over from its current home in Wachovia to an IRA in NFCU.
The lady who set up my acocunt at NFCU gave me two forms: one for a Traditional IRA and one for a Roth IRA, depending on which I was going to do. (Or was it needed to do?) I just called a representative from Wachovia to update my information through them and to ask if it mattered which I did and didn't get an answer, other than to talk to NFCU. (Which isn't open yet.)
So what I want to know is: what's the difference between these two? Am I free to use whichever I'd like or is it dependent on my new institute?
radroadkill on
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Unless you are in a very high tax bracket right now and make an obscene amount of money, I'd go with the Roth IRA.
Roth IRA: When you fund a Roth IRA you may not deduct the contributions*. Though when you start taking distributions, you will not be liable for any taxes on gains in Roth IRA accounts. (tax-exempt growth, because it was funded with after-tax dollars).
Your 401K likely worked like a traditional IRA (meaning it was probably funded with pre-tax dollars). If it was a Roth 401K then it worked like a Roth IRA (funded with money you already paid taxes on). I'm not sure if you can convert a traditional 401K to a Roth IRA (I would think there would be some fees involved, because you'd be converting from an account that was funded with pre-tax dollars to an account funded with after-tax dollars).
Whether you want to fund a Roth IRA or Traditional IRA depends primarily upon what your marginal tax rate is now compared to what you think it will be when you take distributions. If you think your marginal tax rate is going to be higher at retirement time (likely if you're in your 20's-30's) then a Roth makes sense (better to pay 20-28% now and have it grow tax free in a Roth IRA, then skip paying taxes now and paying 30-40%+ when you take distributions from a Traditional IRA).
For more detailed explanations look here.
EDIT: Singles making more than 95K or couples making more than 150K cannot do Roth IRA (at least that's where the contribution limits start going down, not sure if they can participate or not).
Roth IRAs also have some benefits, like you can take your money out penalty free if your account is more than 5 years old and you're using that money to buy your first house (I think this is still a rule).
You should be able to use either one.
Talk to woman who gave you the forms. She should be able to (or put you in contact with someone who can) help you decide which one you'd be better off with.