How to Roll a 401k to a Roth Ira
How can I roll my 401k to a Roth Ira is a question many may need to ask. In some situations it can be worthwhile financially to roll your 401k to a Roth Ira to provide a means of conservative growth.
- Difficulty:
- Moderately Easy
Instructions
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Most employees have some sort of qualified employer retirement plan, the most common being a 401k.
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It is often asked if a 401k can be rolled into a different form of Ira with unique benefits called a Roth Ira.
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A Roth Ira can offer many advantages for retirement including providing back end benefits.
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Although no tax deductions can be taken for contributions made toward a Roth, earnings on those contributions are completely tax free when withdrawn for retirement.
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To rollover your 401k to a Roth Ira you must do whats called a Re-characterization of the funds.
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This means you must pay all taxes on this amount earned in your 401k first before transferring it into the Roth Ira plan.
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Once the tax is payed in full the Roth IRA is put into place and the interest can grow tax free and when you decide to use the money for retirement you can withdraw it tax free.
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Another advantage to a 401k to Roth Ira rollover is you can leave the money in your account and it will go to your heirs tax free as well.
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Tips & Warnings
Make sure you have enough money outside your 401k to pay the taxes for your rollover or it can be costly.
Best to rollover when tax rate is low now and fund is getting good interest rate so as to avoid paying a higher tax rate on full appreciation of the fund upon withdraw.
