Why would you want to roll over your Roth 401(k)?
There are several reasons why you might be considering moving your Roth 401(k) plan.
- More freedom to invest in what you want. Most 401(k) plans – traditional and Roth alike – are almost certainly going to offer a set of mutual funds for you to choose from. While this is probably suitable for a majority of people, you might want to invest in other investment options, like individual stocks, ETFs, or even alternative assets like crypto. For this reason, some people roll their 401(k) over to an IRA account at an outside provider to take advantage of more investment choices.
- Potentially lower fees. There are legacy 401(k) plans that charge higher-than-market rates to administer their underlying accounts. This is something to be explored in your former employer’s plan documents, but these fees can come in the form of “administrative” or “management” expenses. While the fees may not be particularly significant in any one year, they do add up over time. IRAs are generally free of these
fees, especially if you use an online brokerage platform.
- Consolidation. As life goes on and your financial assets expand, there is a tendency for things to become scattered and overly complex. This could mean many accounts at several different institutions, each with various investments – some of which may be redundant and/or outdated. Rolling over your Roth 401(k) to a Roth IRA is one way to consolidate and make things a bit easier to manage.
- Remove all connections to your previous employer. Keeping an old Roth 401(k) under the umbrella of your previous employer may not be something with which you’re comfortable. Moving your Roth 401(k) is a way of breaking away completely and becoming a more independent entity from a personal finance standpoint. While this may not be a reason for everyone, it can play a role in your decision-making process.
- A penalty-free option compared to a withdrawal. Rolling over your Roth 401(k) simply means moving the account to another institution; in the majority of cases, you’ll never receive the money directly. A properly completed rollover should involve no early withdrawal penalties or taxes from the IRS. If you’re unsure about the type of account you have, it may be best to speak with a financial advisor or a tax advisor to avoid any unnecessary tax implications.
How to Roll Your Roth 401(k) to a Roth IRA
The process might seem complicated if it’s your first time, but it’s typically straightforward if you know what to expect after you’ve confirmed your eligibility for a distribution or rollover. In the case of Roth accounts, taxes are no longer part of the equation – which makes a rollover even easier. This process won’t work if you’re still with your employer, but if you’ve found a new role and are looking to move an old Roth 401(k), read on.
1. Open a Roth IRA at a provider of your choice
The word “provider” here is meant to refer to an online brokerage platform (like SoFi, Fidelity, or Betterment) or other financial institution. You’ll need to visit your chosen provider’s website and go through the account-opening process, which typically can be finished in less than 30 minutes. Make sure that the account you open isn’t a Traditional IRA (pre-tax) since your Roth 401(k) is comprised of after-tax dollars.
There’s also a possibility that you have an existing Roth IRA retirement account. If this is the case, you won’t need to open a new one; you can simply use it as the destination account for your Roth 401(k).
2. Contact your former employer’s 401(k) plan
This is something that can be done in one of two ways. In certain cases, you can simply call your new Roth IRA provider and have them do most of the work – some will be able to contact your former employer’s 401(k) plan administrator for you, but there’s also a chance you’ll be responsible for coordinating. If you’d like assistance with this process, Capitalize is here to assist.
In the event that you do need to proactively reach out to your previous employer, read on for instructions.
You should be able to find contact information in the document packet you received when you left your job, or, alternatively, you can find the phone number to reach 401(k) support on your previous employer’s HR website.
You’ll want to call them and request a direct transfer of your Roth 401(k) retirement funds to the Roth IRA mentioned in the previous step.
The important part here is to ensure that the transfer of assets is a “direct transfer” or a “trustee-to-trustee” transfer. This ensures that you don’t receive plan assets directly, and they are instead sent to the provider that handles your Roth IRA. In an ideal rollover process, you shouldn’t receive a check, and the money should simply transfer electronically from your previous employer’s Roth 401(k) plan to your Roth IRA.
In the event that you do receive a check for the balance of your Roth 401(k), but the check is made out to your new provider for your benefit, you still are in the realm of direct rollovers. All you’ll need to do is forward the check along to your new provider via mail or mobile deposit, and they will deposit it for you into your new account.
If you receive a check and it’s made out to you as an individual, we enter the land of indirect rollovers. While it’s not the preferred way to complete a 401(k) rollover, it’s still possible to accomplish your rollover this way. If you do receive a check for your 401(k) balance, you’ll need to deposit the money to a bank account and then transfer the entire amount to your chosen Roth IRA provider within 60 days; if you fail to do this, and you’re under 59.5, you may be liable You’ll likely face a 10% federal penalty tax plus taxes on the earnings of your contributions.
Remember to ensure that the entire amount of your Roth 401(k) must find its way to your new Roth IRA within 60 days if you’ve received a check made out to you!
3. Wait for Roth 401(k) funds to arrive at new provider
There will likely be a 1-2 week wait time between when the transfer is initiated and when the funds arrive. The money will usually not transfer “in-kind”, which means your previous investments will likely be liquidated before the funds are sent to your new provider.
4. Invest the money in your Roth IRA
A common pitfall for people that go through this process is that they’ll see the funds arrive in their Roth IRA, and think that the process is complete. It is not.
You’ll need to go into the account and actively invest the account balance, ideally in the context of all of the accounts you have.
When you’ve completed this step, you’re done! You now have a tax-exempt Roth IRA growing in perpetuity – all with a zero tax liability (assuming all holding period considerations have been met).