If you are looking to keep the 401k contributions the your employer sponsored during your tenure safe, secure, and yielding gains, then rolling it over into a Roth IRA is probably the best move you will ever make. The benefits are substantial and will bode well when you truly retire from the daily grind. The problem with this is that most people do not know how to do it and why they should. Here are some tips to ponder on when rolling over your 401k into an IRA.
- Know the benefits. It is simple actually. While the 401k and a Roth IRA are specifically created to prepare a person for retirement, the Roth IRA provides better returns on investment due to the fact that the gains are tax free. Yes, it may sound unbelievable but it is true. This reason alone is the best advantage you can get by doing it which really makes the move financially sound and smart.
- Know when to roll it over. The right time to make the move is when you resign or retire from work with your current employer. This is the time when you can withdraw the 401k funds and make the investments you want to make. Now, according to the IRS, you cannot rollover the funds to a Roth IRA immediately after withdrawal. You are required to wait for 60 days before you can make the investment. This being said, once you withdraw your 401k, make sure to use it on other investments first before moving it into an IRA. However, waiting does not mean that you can’t open an IRA from the get go. In fact, it is encouraged that to make an investment with or without your 401k.
- Open a Roth IRA account. To open a Roth IRA account, you will need a brokerage firm or bank to make the arrangements. Shop around for the best deals as the fees may vary from institution to institution. Bear in mind that there is a minimum investment required to open one and that there is a limit on yearly contributions to the account. Yes, the gains are tax free but there are limitations so that people do not abuse the benefit.
- Roll it over. Once the 60 day limit expires, you can now invest the money from the 401k into the IRA account. However, since there is a limit on contributions, you will have to do it gradually. Hence, you will want to make other investments first before you can place all the funds into the IRA. Deposit it in the bank, invest in other markets, or place it under the mattress, just make sure that you slowly but surely roll it over into the IRA later on.
- Trade wisely. The funds in your IRA can be used for investment in various markets as well whether it is stocks, bonds, options, or futures. Again, since the gains are tax free, there will be some limits. Furthermore, there are risks as well. Remember, there is no foolproof investment.
Now that you know how to make use of your 401k funds wisely, start inquiring with brokerage firms and banks on the specific details of the process. Again, make sure you choose the institution that provides you the best options.