Like most Americans, you may have been employed in a line of jobs all through your career, leaving behind the path of partially-funded employer-sponsored retirement accounts. Consolidating these company accounts into one core Roth IRA rollover makes great financial sense, yet you'll need to be careful to be able to structure the Roth IRA rollover process effectively in order to avoid costly penalties and fees.
But first, why should you take the time consolidating your previous retirement accounts? Although just about any funds you've invested in employer-sponsored retirement plans will continue to grow, even after you've left the respective business employers, you aren't earning the absolute maximum possible benefit from your own retirement savings. First off, retirement accounts must be periodically rebalanced in order to ensure that your particular investment options stay in line with your personal savings plan. It's much more likely which you'll properly manage one account instead of dividing your time and effort over several different programs.
Additionally, it's important to remember that employer-sponsored plans are infamously limited in their investment options. This means that you likely won't get the best-performing retirement savings programs. For example, if real estate is appreciating and your old 401k does not offer a real estate investment trust or mutual funds, you cannot take advantage. By rolling your previous employer-sponsored retirement plans right into a central account by way of a Roth IRA rollovers, you'll have access to virtually unlimited investment options.
Have a meeting with your tax accountant. Go over how much tax you will owe when converting a 401(k) or IRA via Roth IRA rollover. You will need to have cash available to pay that tax or you may find that spreading the Roth IRA conversion from the traditional pretax accounts to the Roth account over a number of years, is preferable.
To initiate Roth IRA rollovers, you should first establish the particular Roth account into which you'll be moving the particular funds. Note that you only need one account even though you may be converting a traditional IRA and 2 401k accounts.
Once your brand new account is established, start the Roth IRA rollover process. Contact the HR departments of your old employers or administrator of each old employer-sponsored retirement plan provider and order the documentation required to initiate a rollover. Each plan will more than likely have slightly differing paperwork, but these will include at least a couple of major sections such as a place to enter information about the account accepting the Roth IRA rollover.
In the area detailing how the Roth IRA rollover will take place, you'll generally have two choices. Either the actual retirement plans will handle the transfer of funds between themselves, without the involvement from you, or you can receive the distribution which you will and then deposit into the new Roth account. In almost all instances, it's best to allow the businesses to handle Roth IRA rollovers between the firms directly (called an IRA direct rollover), since this will help you to avoid the prospective penalties that could occur if the funds aren't reinvested in a specific period of time.
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