Do you have a few ex-employers with some funds left at each 401k plan?
Consolidating these accounts into one central Roth 401k rollover account makes excellent financial sense, but you must be careful to structure the particular Roth 401k rollover process correctly to counteract taxes and penalties.
But first, why wouldn't you bother consolidating your previous retirement accounts? Although any cash you've invested in employer-sponsored retirement plans continues to grow untouched and tax deferred, are there benefits you are missing? Let's consider three major issues:
- First of all, retirement accounts need to be occasionally rebalanced in order to ensure that your investment choices remain in line with your personal savings plan. It's much more likely that you'll correctly manage one account instead of splitting your time over several different programs.
- Additionally, it's important to keep in mind that employer-sponsored plans are notoriously limited in their offering of investment options. By rolling your old employer-sponsored retirement plans into a one account via a Roth 401k rollover, you'll have access to a wider variety of investment opportunities with higher potential returns.
- There is a major issue with excessive 401k fees. Extra fees erode your investment growth. Once the money is in your own Roth 401k rollover account, you control the investment selections and can eliminate any unnecessary fees.
So now that you already know why a Roth 401k rollover to IRA is a good plan, let's have a look at how to do it. To initiate the particular Roth 401k rollover process, you'll need to very first establish the Roth IRA into which you'll be moving the particular retirement funds from the various 401k plans.
Once your new account is made, you can begin the Roth 401k rollover procedure. Contact the old employers or reps of each old employer-sponsored retirement plan provider and request the forms necessary to initiate a Roth 401k rollover. Each plan will likely have a bit different paperwork, but these will include at least two significant sections - a place to go in details about the account finding the Roth 401k rollover funds and a area describing how you'd like the conversion to occur.
In the section outlining how the Roth 401k rollover will happen, you'll generally have two options to make a decision between. Either the retirement program providers will handle the actual switch internally, amongst themselves, without any effort from you, or you can get a cash distribution which you will deposit into your new Roth IRA. In almost all cases, it's best to enable the companies to handle the Roth 401k rollover internally, as this will help you to stay away from the potential penalties that could implement if the funds aren't reinvested within a particular period of time.
In addition, keep in mind that any funds you transfer from a tax-deferred retirement account (being a traditional 401k or IRA) into your new account by way of a Roth 401k rollover will be taxed in accordance with your ordinary income rates. For this reason, it's best to meet with a tax professional or retirement advisor to understand the actual implications of a Roth 401k rollover ahead of initiating the process.
Lose a Fortune on Your 401k Rollover
If you do not do any of these correctly:
- Opt for a distribution rather than direct transfer
- Rollover company stock to an IRA
- Choose to rollover to a Roth IRA
- Rollover to your new employer’s 401k
- Rollover post-tax contributions