Use A 401(k) Rollover To Roth IRA When You Change Jobs

The key to building a financially secure retirement is to keep your investments in a tax-sheltered plan during your entire working career. As people are changing jobs more and more, they need to transfer assets from an employer-sponsored plan. The IRS provides you with options for a 401(k) rollover to Roth IRA when you leave your job.

A rollover means that you are transferring your assets to another financial institution and changing trustees. If you are doing this yourself, the paperwork can be complicated and time-consuming. To expedite the process, you may want to do a direct rollover where you don’t actually handle the funds.

Should You Use A Rollover IRA?

Unless you are satisfied with your existing plan and your past employer will allow you to keep funds there, a rollover IRA is recommended. The 401(k) rollover to Roth IRA allows you to avoid taxes and penalties, keep your money growing, and expand your investment options with no constraints.

A financial services firm is aware of Roth IRA conversion rules and will help you to set up a rollover IRA account. They can handle the paperwork needed to transfer assets from other qualified plan accounts like the 401(k), 403(b), and Traditional IRA. Notify your employer you intend to rollover your retirement plan and provide the contact information of the new trustees.

Choices For Converting 401(k) To Roth IRA

The options you have for your retirement savings when going to a new job are:
• Do nothing and continue to manage investments with no contributions
• Transfer to a new plan offer by new company
• Withdraw your assets as cash and lose 20% to taxes
• 401(k) rollover to Roth IRA

When you are investing in your employer's retirement accounts, you may be limited in the mutual funds or other investment products you can choose. When you rollover 401k to Roth IRA, you may find you have more choices in investment options. You can work with Scottrade, TD Ameritrade or other companies to find the best investment vehicles for your retirement accounts.

Tax Benefits Of Investing In A Roth IRA

The biggest reason to consider a 401(k) rollover to Roth IRA is probably the tax deferred benefits. Roth IRA contributions are made with after tax income. The contribution limits are based on MAGI, or modified adjusted gross income. This means that any contributions have already been taxed. Since the money can't be taxed twice, any distribution from the Roth IRA account is tax free no matter the tax brackets.

You can also receive a check for the value of your assets to fund the rollover. The employer is required to withhold 20% for income tax purposes and a penalty of 10% will be assessed if not done within 60 days. Make sure not to miss the deadline or the amount will be viewed as a premature distribution.

Protection For Retirement Accounts

Thanks to the Pension Protection Act of 2006, it is much easier today to perform a rollover to Roth IRA. This act took away the requirement that funds first be rolled over to a traditional IRA before they could be converted to a Roth IRA. In the years after 2010, the rollover ceiling will also be eliminated, allowing more people to perform a 401(k) rollover to Roth IRA than before, despite income reported on a 1099 form.

If you have been concerned about whether your retirement planning is in the best plan, this may be the time to weigh the benefits of a 401(k) rollover to Roth IRA. While this change is not right for everyone, factors may determine that investing in Roth IRA meets your individual needs.