When you leave your job, you have a few options for what to do with your 401(k). You can cash it out, leave it with your former employer, or roll it over into an Individual Retirement Account (IRA) or a Roth IRA.
If you have a traditional 401(k), it’s probably made up of pretax dollars. That means you didn’t pay taxes on that money when you earned it, but you will when you withdraw it in retirement.
A Roth 401(k), on the other hand, is funded with after-tax dollars. You’ve already paid taxes on that money, so you won’t owe any taxes when you withdraw it in retirement.
Which one is right for you? It depends on a few factors.
If you think you’ll be in a lower tax bracket in retirement than you are now, a traditional 401(k) may be the better choice. You’ll pay taxes on the money when you withdraw it, but it will be taxed at a lower rate than it is now.
On the other hand, if you think you’ll be in a higher tax bracket in retirement, a Roth 401(k) may be the better choice. You’ve already paid taxes on the money, so you won’t have to pay taxes again when you withdraw it in retirement.
Either way, you have the option to convert your traditional 401(k) to a Roth 401(k). You’ll have to pay taxes on the money you convert, but it can be worth it if you think you’ll be in a lower tax bracket in retirement.
If you’re not sure which one is right for you, talk to a financial advisor. They can help you figure out which option is best for your individual situation.
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