401k Question

Fyi, you can't roll it into a Roth unless it is specifically a Roth 401(k), which have only been around since 2006 or so. You could roll it to a traditional IRA and then do a conversion (by paying taxes on the amount converted) to get it into a Roth IRA. If you are happy with your investment choices in the 401(k), which probably number only in the dozens, then keeping it there is an OK choice, but by putting it into a traditional IRA nearly the whole market opens up to you as options. In other words by having the money in a traditional IRA, you can invest in almost any stock or mutual fund you want to and arent limited to the few choices in your 401(k) plan. Hope this helps.

Keep in mind that whatever assets you own, and are doing so well for you in your 401(k) plan, can probably also be owned in a IRA. Just because a certain investment is in a 401(k) plan doesn't mean it's not available to the general public. So for instance if you own $100,000 worth of a certain Vanguard Mutual Fund in your 401(k) plan, you can probably buy that same Vanguard Mutual Fund in an IRA. Just because you are doing well in your investments in your 401(k) doesn't mean you can't do just as well with the exact same investments in a rollover IRA. Whether in the process of the rollover you have to convert that amount to cash then rebuy the mutual fund after the rollover or if you can just rollover the assets is something I'm not that familiar with.

If you do go ahead with the rollover to a traditional IRA then do the conversion to a Roth (AFAIK it has to be a two step process, you can't do a direct rollover from a traditional 401(k) to a Roth IRA) you will owe ordinary income taxes on the amount converted (minus any post-tax amounts in your accounts), so where you get the money to pay those taxes is important. If you happen to have the money to pay them outside of any retirement accounts (or are over 59.5 years of age, which I gather you are not) that is the ideal situation, because if you have to do withdrawals from the retirement accounts to come up with the money to pay for the taxes, those withdrawals will also be subject to the 10% early withdrawal penalty.

Also, you are correct about the differences between the IRA and ROTH IRA. In the traditional IRA, you don't pay taxes on the contributions, but you pay taxes on the withdrawals. In a Roth IRA, you pay taxes on the contributions, but don't pay any taxes on the withdrawals. Another side benefit of the Roth is that all the contributions are yours at any time and withdrawals are designated on a FIFO (First In First Out) basis. So say you have put $20,000 into a Roth IRA over the past couple of years, and it has grown to $30,000. You can withdraw that $20,000 at any time you want(no tax, no penalty), so it kind of acts as a extreme emergency fund. That idea does work a little differently in a conversion situation, because there is a five year waiting period on being able to withdraw money you have converted.

Two great resources for information on this stuff are the website fairmark.com and a website associated with a financial planner named Ed Slott (he is truly the IRA expert and is where I've learned all this info from)