How to Roll From a Qualified 401K to a Roth IRA
Rolling retirement investment money from a qualified 401k to a Roth IRA is a prudent financial move for some investors. This usually happens when a worker leaves the employer sponsoring the 401k and he or she wants to take advantage of the long-term tax savings offered by a Roth IRA. Internal Revenue Service rules allow employers to charge higher 401k maintenance fees to former employees who keep their money in the plan. A 401k-to-Roth IRA rollover allows taxpayers to pay lower fees and maintain more control over their retirement money.
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Instructions
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Determine whether you are allowed to roll your money from a qualified 401k to a Roth IRA. The IRS only permits it if your modified adjusted gross income is less than $100,000 in the tax year of the rollover. If you made too much money in the year you left a 401k plan, you can wait until a later tax year when you make less than $100,000. Another option is to roll the money into a Traditional IRA that has no income limits.
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Pick a Roth IRA account to roll the money into. This can be an existing Roth IRA account or a new one. Roth IRAs are offered by all sorts of financial institutions including banks, stockbrokers and mutual fund companies. Most investors choose a mutual fund company because of the diversity of investment options. No-load mutual funds have low fees and do not charge you to buy or sell shares. Any financial institution that has Roth IRAs will walk you through the paperwork to open one.
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Let the financial institution hosting your Roth IRA know that it will be funded with money from a qualified 401k. They will ask you who is holding your 401k account and make sure that you have all the information you need from your Roth IRA account. Take note of the account number, fund name and address of the Roth IRA financial institution.
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Order the sponsor of your 401k plan to roll the money from your qualified 401k to your Roth IRA account. They will require you to fill out and sign paperwork authorizing it. Be certain to tell them specifically where the money is going. Double check the address and account number.
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Choose to roll your 401k funds directly to your Roth IRA if this is an option. The financial institutions will deal directly with each other and you won't have to do anything else. If this is not an option, a check with the funds will be sent to you. Make sure that the check is written out to the Roth IRA account and not you. When you get the check, immediately forward it to the Roth IRA account.
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Understand the tax consequences of a 401k-to-Roth IRA rollover. The money in a 401k has not been taxed. Money in a Roth IRA is post-tax. When you roll from a 401k to a Roth IRA, it is considered a redemption then a contribution. That means taxes must be paid on the 401k money. This can be a considerable amount if your 401k is large. As difficult as this might be to stomach, the long-term tax savings could be much more. The money is allowed to grow tax free in the Roth IRA until you withdraw it. If you have a long time until retirement, this is a huge financial benefit.
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Tips & Warnings
Another option is to roll your 401k money into a Traditional IRA tax free. At a later date you can move the money from the Traditional IRA account to a Roth IRA account.
