Why does Suze Orman say to put your 401k rollover from previous employer in traditional IRA?

Question

Suze Orman gives advice that people should rollover your previous employment 401k into traditional IRA. Then she says that in 2010 to move this traditional IRA money to a Roth IRA.

Several Questions:

1. What is a "traditional" IRA?

2. What is the logic/benefit to move it to a Roth IRA in 2010?

3. Won't it get taxed once it is moved to Roth IRA? If not, why not?

Answer 1

If you roll it over into an IRA and then contribute to it, you lose the opportunity to roll it into another employers 401k or other retirement plan.

Answer 2

1. A traditional IRA is a tax-deferred account.  You can contribute up to $5,000 per year and reduce your taxable income.  In other words, you pay no taxes on the contribution, but it grows tax-free until you withdraw it (at which it is taxed as ordinary income)

2. Some think that our tax rates must go up since they are currently at historic lows.  So pay a low tax now and then no taxes later (Roth).  So, Bush's tax cuts go away in 2010 so our taxes will go up in 2011 when Congress doesn't renew them.  Plus, in 2010, even high income people not normally eligible for a Roth will be able to convert.

3. It will be taxed when you move it over.  But you will never have to pay taxes on that money again!

Note: you should not do this if you are close to retirement and have a large percentage of employer stock in your 401k.

Answer 3

because she's hitching everyones financial future on the fact that she thinks we will all be paying HIGHER taxes when we retire than we are now.    So she's saying that in 2010 when you can convert large sums into a ROTH rather than the limited amounts now you can basically make your entire account non-taxable.  

However, unless she personally guarantees her statements (which she won't) with an annuity that will make up the difference should your taxes actually be lower then I'd hedge my bets and put some in pre-tax, some in after tax, and some in tax free municipal bonds.  Diversity is not limited to just where you invest but in the tax status of the money.

And, you'll have to remember that it's not a tax free move.  If you've got 150k in your retirement in 2010 then you'll owe 28% in taxes on that amount or 42k.  Might want to save some cash....because yes..it's penalty free transfer but not a tax-free transfer.