401k Rollover to Roth IRA? This is becoming a more frequent topic of conversation for investors trying to make the smartest decision for their financial futures. Lets explain in some detail the difference between a 401(k) and a Roth IRA, then we can see if a rollover is a good idea.

The 401(k) is a retirement savings plan that is sponsored by an employer. Their 401(k) plan allows you to save for your retirement by making contributions from gross (untaxed) income. The 401(k) balance can grow over time and then be withdrawn after you reach age 59½. Withdrawals are subject to ordinary income tax at the prevailing rate.

When you leave their employment, you have the option to leave the funds in their care or to transfer the funds out to a suitable alternative retirement plan like the Roth IRA some of which you can use on investment property. It is worth noting that former employers are within their rights to charge higher fees to maintain a 401(k) plan for former employees, so leaving the funds with them may be more expensive than in the past.

The Roth IRA is a retirement savings plan that came into existence in the late 90s to provide a way to invest net (already taxed) income in a tax-efficient manner. Funds in a Roth IRA are not subject to taxation from within the Roth and also not usually liable on withdrawals either. There are a number of provisions here where a Roth IRA withdrawal is possible if you are below the withdrawal age of 59½, and agree to pay the penalties and taxes. If you consider an early withdrawal, you will need to examine the current legislation very carefully to understand your tax liabilities from such a decision.

A rollover from a 401(k) to a Roth IRA is intended to move funds from the care of your former employer to a new custodian of your choosing. You are free to select a bank, brokerage house or mutual fund family to administer the Roth IRA on your behalf. Particularly with the mutual fund family, this would give you access to a wide array of investment possibilities, usually much broader than most 401(k) fund selections available to both current and former employees.

If you do opt to perform the rollover, you will need to determine your tax liability. You will be moving funds from a 401(k) plan where you paid money in from gross (untaxed) income, to a Roth IRA that is setup only to accept net (taxed) income. Tax adjustments in the form of taxes in the current tax year will need to rectify the difference. This tax bill can be quite substantial.

Once you decide to proceed, you will need to open the new Roth IRA and inform the provider that you plan to rollover the balance of your 401(k) plan to the Roth IRA. You will also need to inform your 401(k) sponsor of your intention to rollover the balance to your new Roth IRA and to provide them will all the relevant account details.

If you are saving money for retirement, then why would you let even a penny of it goes to waste? Sadly, this is what happens to many people who do not bother to learn enough about how to rollover their 401k to their new employer.
If you are changing jobs, then you need to rollover your funds or else you will lose them. Doing a 401k rollover is not that difficult of a process when you consider the implications of not doing a rollover. What you need to do is ask your current employer what your options are in this area. Sometimes you are only going to be able to rollover the portion of money that you placed into the fund yourself. The employer does not want to give away the money that they have contributed to your fund (if they did put some money in there).

Another thing you are going to need to look into is if the 401k from your current employer will roll over exactly into their 401k offerings. Two companies may not have the exact same 401k offerings, but there are usually something similar that can match up well. If you have investing a portion of your money from your 401k into your company’s stock, then you may need to sell off that stock to get the full benefits of that money. Obviously you will not be able to roll over an individual stock like that into your new company. Therefore, you should probably not buy as much of your company’s individual stock in your 401k in case you ever have to roll it over. It just makes everything a little bit more difficult for you.

You should always roll over your 401k any time you change jobs, because this is your retirement money and you have worked hard for it.