Since the start of Roth IRAs around the mid to late 90's, millions of people have converted their particular IRAs into Roth IRAs, in any other case they rolled their qualified plan balances (i.e. 401k) into IRAs, and then transferred the rollover balance in to a Roth IRA. Now, qualified plan contributors to do a direct Roth 401k roll over, without having to first roll the 401k into a traditional IRA. The enticement for these mechanics are the tax free distributions form the Roth IRA.
If you are thinking about retiring from your latest job and want to transfer your company plan balance to a Roth 401k rollover account, first establish a Roth IRA account a the financial institution of your choice. Then, when you complete the employer's paperwork for the transfer, you will specify this account to receive the funds. If you already have a Roth IRA, this can serve as your your Roth 401k rollover account.
The pre-tax amount (the funds which have never been taxed) of the Roth 401k rollover will be taxed as regular earnings, the same as from a classic IRA to Roth Individual retirement account conversion. Because this may be a significant tax all at once, you may not want to convert the entire 401k balance in one year. You might spread the conversion out over a few years in order to convert the entire balance and avoid pushing yourself into s higher tax bracket. Your own tax advisor will be able to help you determine the best course with these IRA tax bracket issues.
One essential item to remember when you have company stock inside their retirement plans will be the NUA (net unrealized appreciation) principle, which allows you to market your company stock in a separate transaction that might be taxed largely like a capital gain as opposed to ordinary income. If you're planning on selling the investment separately, be certain to not include it whenever you roll funds to your Roth 401k rollover account.
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