The process is a fairly simple one to rollover your 401k to an IRA. You should consult a professional during the process, however. Your employer’s plan should have an advisor available to assist you.
How to Rollover a 401k to a Roth IRA: It’s Easy
Here are the five simple steps you’ll need to take:
1. Calculate how much taxes you’ll need to pay upfront
You will need to pay taxes at the time of conversion. This is due to the fact you receive a tax deduction at the time you contribute to a traditional IRA. Beware this can be a heavy lift if you are rolling over a large balance.
2. Plan how you’ll pay the taxes
The tax due on your rollover will be calculated and paid when you file your annual tax return. Plan ahead whether those additional taxes due can be offset by a separate loss, or save up throughout the year. A good tax attorney will help you develop a strategy to reduce the impact as much as possible.
3. Determine where you’re going to open your Roth IRA account
Ideally, you’ll work with the same broker your traditional IRA is held with. However, if your current broker doesn’t have good investment options or hefty fees, you may want to research other options.
4. Avoid penalties and additional taxes
If you decide to go with a separate brokerage firm, avoid receiving any money directly. Also, make sure you open your new account within 60 days, or the IRS will consider it an early withdrawal which is subject to interest and penalties.
5. Fill out the paperwork
Consider your work done once the above decisions are made and the appropriate paperwork is completed. Congratulations on taking a strategic approach to your retirement.
Benefits of a Roth IRA
If you’re leaving your job or simply looking for a better option for your retirement funds, you have several options on how to convert your 401k. The most popular option is to rollover your 401k into a Roth IRA. Here are a few reasons why:
You can withdraw retirement funds from a Roth IRA tax-free. You need to pay taxes on any contributions to a Roth IRA at the time you make a contribution, however, withdrawals are tax-free.
Withdraw contributions from your Roth IRA at any time. Penalties will be assessed on any early withdrawals from your traditional IRA. However, you can withdraw your contributions (not gains) from your Roth IRA tax-free.
There are no minimum distributions from your Roth IRA based on age. A traditional IRA requires you to start taking distributions at age 70 ½. With a Roth IRA, you can contribute for as many years as you like, which may be beneficial if you decide to continue working.
Roth IRAs are tax-free income to your heirs. Additionally, you can leave your account as a legacy for your children and grandchildren. Beneficiaries can take income home without paying any additional taxes on contributions or gains.
Have you recently rolled over your employer-sponsored 401k into a Roth IRA? Share your experience in the comments.
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Kate Fox is a former CPA, with twenty years of experience in public accounting and corporate finance. Born and raised in Alaska, Kate is currently based out of southeastern North Carolina. She loves coaching others on personal finance and spends her free time traveling with her family or relaxing by the pool with a good book, probably about money.