When you leave your company, you have the opportunity to roll your Roth 401k into an IRA. If you change employers every few years, you may end up with a large number of 401k investments that are being administered by your former employers. It can be confusing to track how each one is doing, and to calculate how much you really have saved for retirement. Rolling multiple Roth 401k accounts into a single Roth IRA can make planning for retirement much easier.
Benefits of Roth 401k Rollovers into an IRA
- An IRA offers more control over the type of investments that you want to have in your IRA, and if you choose a self-directed IRA, it can include investment property.
- It is easier to track one account then several different accounts at a wide variety of employers.
- The ability to choose the company that manages the funds or investments within your IRA.
Advantages of Choosing a Roth IRA for your 401k Rollover
When you are rolling over a Roth 401k, it makes sense to roll it over into a Roth IRA, because you have already paid the taxes on your contributions. If you choose a traditional IRA, you will be taxed twice: both on your contributions and on your withdrawals. The Roth IRA is set up so that your contributions are taxed, and you do not need to pay any taxes when you begin withdrawing money once you reach retirement age. Be sure that you are signing up for a Roth IRA, if you are rolling over from a Roth 401k.
Steps to Roth 401k Rollovers into an IRA
- Contact your 401k plan’s administrator and ask to begin the process to cash out your 401k for a 401k withdrawal. You will receive an application that you will need to fill out and mail in for the process to complete.
- Begin looking for a company to act as the Roth IRA administrator. You can choose between a bank, a traditional investing firm, or a firm that offers self directed IRAs.
- Open an account within 60 days of your withdrawal to avoid any penalties that you may face for early withdrawal. This is essential, and you should begin the process of opening the account at nearly the same time you begin the process of cashing out your 401k.
Selecting an IRA for your Roth 401k Rollover
Choosing the best IRA is a very important part of the process. You want to choose an option that matches the type of risk that you want to take. The closer you are to retirement age, the more conservative you want to be with your investments overall, because you may not have the time you need for the market to fully recover. Investing in property, precious metals and other options allows you to tailor your investments to your comfort level while still allowing them to grow at an acceptable rate. There are three main places that you can open an IRA.
- Bank or Credit Union: A bank or credit union will allow you to open an IRA and will use Certificates of Deposit (CDs) as the investment tool. The rate of return on CDs is fairly low, and this is a very conservative investment that may not keep up with the rate of inflation. However, the money is guaranteed by the FDIC for up to $250,000 if the bank were to close down.
- Traditional Investing Firm: A traditional investing firm offers IRAs to its customers. The accounts are similar to a 401k, where you choose your risk level and then the investment firm manages the mutual funds, which your IRA holds as the investment. You have more control over you choices than with a 401k, but you are still limited when it comes to choosing your investments.
- Self-Directed IRA: A self-directed IRA allows you to choose your investments on your own. You can invest in stocks, property, gold and a number of other options. You have complete control over your investments. There are strict rules about acceptable transactions that you will need to review before you open the account, but if you want more control over your investments, then you should definitely consider this option.
You can find more about the different options and receive a referral to a trusted IRA provider by call (800) 767-1423. You can choose the investment option that matches your comfort level and investing goals.
Completing the Roth 401k Rollover Process
It is important to complete the rollover in a timely manner so that you can avoid 401k taxes and 401k withdrawal penalties for an early withdrawal. The deadline is not flexible, and you may want to choose where you want to open your IRA before you begin the process of cashing out your 401k. They may be willing to work with you on the paperwork, and have the check for the proceeds of your 401k mailed directly to them. Be sure to follow up on the process to make sure everything is in place before the deadline.
Avoiding Penalties and Interest on Roth 401k Rollovers
With a Roth 401k to a Roth IRA rollover, you will not need to pay any taxes as you make the conversion, and you can avoid the penalties as long as you complete the process within the 60-day deadline. If you miss it, the IRS will consider it an early withdrawal, and you will pay the 10% penalty as well as pay any taxes owed. It is important to be prepared for this if you do miss the deadline. Additionally, you will not be able to put the money back into a tax-sheltered retirement account because the contribution limits will then apply to that money.
Converting a Traditional 401k into a Roth IRA
You also have the option to convert a traditional 401k into a Roth IRA transfer. The process is a bit more complicated than a straight rollover, because you will be required to pay income tax on the amount in your 401k. The savings overall will be worth it, but you need to be prepared to pay the taxes before you begin the process.
- Begin the process of cashing out your 401k by contacting your 401k plan’s administrator. You will receive paperwork that you will need to fill out to complete the process.
- Determine the amount that you will need to pay in taxes. You will pay the taxes at your current tax rate. This will be added to your gross income for the year, and if you are near the top of your tax bracket, it may bump you into a higher bracket. You will always need to plan to pay state taxes that are due.
- Open your Roth IRA at your chosen institution.
Taxes and Additional Penalties on 401k Rollovers
The process is very similar to that of a straight rollover into the same type of account except for the taxes. If you choose to pay the taxes with money from your 401k, you will also need to pay the penalty. Your 401k plan will report the transaction and whether or not it was supposed to be rolled into a new account to the IRS. If you do not indicate that it is a rollover on the application, then they will send a portion of the payment to the IRS. However, you may still owe more in taxes. For this type of conversion, it is important to talk to your accountant in addition to your investment company to make sure that you have covered all of your tax liability. If you do not have the cash on hand to pay the taxes, you may be better off rolling a traditional 401k into a traditional IRA.
When you are ready to roll your 401k over into an IRA, you need to find a company that you can trust. You can receive referrals of trusted 401k companies for self-directed IRAs and other IRA options by contacting us today.