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Practical Planning Tip: Old 401(k) Options - Maintain Same Tax Status

March 07, 2024

Today we are going to continue our discussion on what to do with money from an old 401k plan.

Specifically, today I will discuss the concept of Making sure to keep the 401k money in an account that has the same tax treatment: The two different methods of being taxed on retirement funds are described in retirement lingo as “Traditional” and “Roth.” In traditional funds, contributions are made with pre-tax dollars, the investor receives a tax deduction, the money grows tax deferred, and the investor pays ordinary income tax on the money withdrawn during retirement. For a Roth account, investors put in after-tax dollars, the funds grow tax deferred, and the investor does NOT pay tax on these funds when they take it out in retirement.

There are merits of both the ROTH and TRADITIONAL, but that’s a whole topic for another day. For this discussion, just be mindful that Traditional funds must be kept in either a Traditional IRA or Traditional 401(k) account and Roth funds must remain in a Roth IRA or Roth 401(k) account. You may also have both pre- and post-tax dollars in your 401(k). The key is to make sure they maintain the same status regardless of what you do with the money.

You can WATCH the full video here.