Investing retirement funds in a Roth 401k is a good new option more and more employers are providing. Although they aren't yet widely recognized as their conventional 401k counterparts, they're definitely worth consideration as part of your retirement savings plan if your employer offers. In this post, we illustrate advantage of a Roth 401k rollover.
Your Roth 401k account offers several unique advantages. Because these company accounts are funded using post-tax contributions (instead of pre-tax funds, as in the case regarding traditional 401k accounts), distributions are tax-free in retirement years. If you anticipate finding yourself in a higher IRA tax bracket on entering retirement, as well as if you believe that general income tax rates increase before you leave the labor force, it may make sense to remove the tax weight on your retirement by paying tax today and voiding it later, as the Roth 401k rollover will do for you.
Additionally, the Roth 401k rollover makes sense as Roth 401k company accounts may make more logic from an estate planning standpoint. Because cash contributed to classic 401k accounts aren't taxed to begin with, taxes must be paid when they're withdrawn from the account. If you leave a conventional 401k account to your beneficiaries, they will need to pay tax when making distributions. Because funds put in a Roth 401k account have already been taxed, the burden in your heirs will be eliminated fully.
However, a Roth 401k rollover isn't as fundamental as just moving the actual funds over from a traditional 401k account. Because the particular funds in your classic 401k haven't yet been subject to taxes, you'll need to complete a Roth 401k rollover in order to pay the taxes and then move the funds to their new Roth tax-free haven.
To start a Roth 401k rollover, you'll need to speak with either the company's human resources department or even your plan's administrator (see the phone number on your statement). Starting with your company's HR office is a good first step -- even if these personnel don't have the necessary documents, they can likely relate you to the best possible person at your company's 401k plan administrator.
Typically, you'll need to develop a set of documents that will detail how much money you wish to include in your Roth 401k rollover and how you want these kind of funds to be dedicated to your new account. You might be given the option to get taxes withheld from your traditional 401k but you don't want to do that. You want to pay IRS with regular money (not money from your 401k) so that you can roll over as much as possible that will later be your retirement tax free nest egg.
Generally, the Roth 401k rollover paperwork is very simple to complete. Before, or even before you begin the process, consult with a retirement advisor so you know how much tax you will need as well as being certain that the benefits far outweigh the tax dollars you need to spend today.
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