Many astute investors already know both sides of the Roth IRA vs 401k debate and have chosen to use this plan as a wealth building tool. It is easy to do a 401k rollover to Roth IRA. It only takes four steps to complete this process and have the investment grow tax-free in the future. There are two reasons 2010 is a great time to do this. Any dollar amount can be converted to a Roth IRA now; from 2005 to 2009 the maximum contribution was limited to $100,000. Taxes are due on the amount invested; in 2010 these taxes can be split and be paid in two years, 2011 and 2012. Starting in the year 2011, the full amount of the taxes due in the year of the rollover must be paid at that time. Investors who make this decision and follow-through in 2010 save money.
The first step in converting a 401k to Roth IRA is to check the requirements with the company holding the 401k. That company will be able to provide the rollover forms necessary to withdraw the funds and any special time limits or procedures that will be needed.
The second step of the process is to find a new home for the investment funds and find out what that investor requires. This company will have paperwork to be filed out, also.
The third step is to fill out the paperwork completely, accurately and submit it along with any additional information requested.
The fourth step is to follow up and make sure the right documents were submitted, the funds were transferred as requested and the new account is set up as agreed. This is the time to double check all the information and dollar amounts.
It can be that simple. There may be some additional Roth IRA qualifications, though. If the company makes the check out to the person doing a Roth IRA withdrawal, that company is obligated to withhold 20% of the amount and submit it to the IRS. The taxpayer would get the money refunded when the income taxes are filed for that year. The Roth IRA withdrawal rules are very strict and say IRA funds must be deposited within 60 days or the taxpayer will have a penalty of 10% plus whatever other taxes are due. This means if the Roth IRA is not fully funded within the 60 day window, the taxpayer will be penalized 10% on the 20% that went to the IRS or needs to have funds available to make up the difference. If the company holding the original IRA pays the funds directly to the company opening the new IRA, this does not occur.
By having a check made out to the new company with the notation “investment for ________”, one hundred percent of the 401k rollover to Roth IRA will take place and protect the investor from penalties and other taxes due on the 20% withheld. This is not a complicated process if the taxpayer has full and complete information to follow the best procedure and protect the funds.
Completing this is a simple, streamlined procedure, if the taxpayer is fully informed, completes the proper paperwork and verifies the paperwork and funds are received.