Why open a Roth IRA when I have a traditional IRA?

Question

When I left my last job, my financial adviser advised me to open a traditional IRA and roll my 401k into it, which I did.

Now I have some extra money each month that I'd like to contribute into that IRA as retirement savings. But my adviser says that's a bad idea and that I should open a Roth IRA instead and put the money there.

So, my main question is why did my adviser have me open a traditional IRA in the first place instead of a Roth IRA? Is he just trying to get another commission, or are there practical reasons why a 401k would be rolled into an traditional IRA, but any other contributions would go into a Roth IRA?

Thanks.

Answer 1

As a previous answerer mentioned, you have to roll a 401k into a traditional IRA on account of the 401k contributions being pre-tax. So that is completely kosher.

Roth contributions, however, are after tax. Which means that you don't get to deduct them from your taxes, as you would a traditional IRA (or pre-tax like a 401k contribution). The benefit is that you will ultimately pay no tax on the distributions. This makes sense for a few reasons: 1) A possibility (if you are a younger worker) that you will make more when you retire (return on investments, social security, pensions, salary, etc) so will be in a higher tax bracket than your are now, 2) You can afford not to deduct your contributions today. So you can afford not to take the deductions today and thus will benefit from higher tax free returns, 3) Income tax rates may be (likely will be) higher in the future, so better to pay it now, 4) A hedge (diversification) against the fact that you can't know future tax rates, so much like your investments, it is best to diversify and prepare for both.

So I would agree with your financial adviser and advise the same thing.

Answer 2

You can only put $4,000 a year into a Roth, and that's only if you make under a certain amount of money per year.  I'm guessing you had more than $4,000 in the 401k, so in order to roll it over you needed to use a traditional IRA.  I believe you can gradually move money from the traditional IRA to the Roth.

Answer 3

401(k) accounts are pretax money, so you have to roll it into a pretax (traditional) IRA to avoid unhappy tax consequences.  What he is now advising is that you contribute your future extra money to a Roth instead of a traditional IRA.  Makes sense.

Answer 4

The biggest difference between a traditional IRA and a Roth IRA is the way you're taxed. This website describes the difference between the two in more detail. Hope it helps!

http://beginnersinvest.about.com/cs/iras...