How to Rollover 401k: Open A Roth IRA Account

Once upon a time, there was such a thing as job security. It wasn't unusual for a person to stay with one employer for twenty years or more, and retire with a pension. Around 1980, the 401k retirement savings plan came on the scene, giving employees more control over their retirement investments. Life was good.

In 2010, job security is more or less a fairy tale. Many people who have never had to deal with unemployment suddenly find themselves changing jobs, and in some cases, career paths. With the stress of scrambling to find a new job, you already have enough on your mind without having to worry about your old 401k, right?

The fact of the matter is that now is the time to start thinking about your next financial move, as well as your next career move.

If you have more than $5000 in your account, you may be able to leave it there to grow while you get things sorted out. You won't be allowed to contribute once you settle in to your new job, though. That doesn't necessarily make it a bad option. If you leave your 401k with your old employer, you'll still have the ability to access it to manage your investments. A lot of people like the investment options that their old plan offers, and choose to leave their account there indefinitely.

One of the most popular options among those looking to rollover 401k plans is to open a Roth IRA. A Roth IRA is usually more flexible than your old 401k, but that flexibility comes at a small price. Unlike your 401k or traditional IRA accounts, Roth IRA contributions are not tax deductible.

A Roth IRA is an individual retirement account the allows you to contribute part of your after tax income, to invest in securities such as stocks and mutual funds.Unlike a traditional IRA, as logn as your account has matured beyond the "seasoning period" and you've reached age 59 ½ , your withdrawals are tax free.

For most people, the benefits of a Roth IRA far outweigh the tax implications. For starters, your contributions grow tax free, and minimum distribution rules do not apply. If can live on whatever other resources you may have, you don't have to start taking distributions at age 70 ½ as you do with other plans. When you're ready to start withdrawing, most distributions are tax free.

After you have withdrawn all of your regular contributions and conversion contributions, you will be drawing on the earnings from your Roth IRA. These distributions may be taxable if you don't meet certain requirements. You must be 59 ½ years old, and your account must have exceeded the 5 year seasoning period.  If you don't meet these criteria, your distributions may be subject to income tax, as well as penalties for early withdrawal.

Tobe eligible to make full contributions to a Roth IRA, you adjusted gross income may not exceed $105,000 for single individuals. Above that level, the limits are lowered, and at $120,000 you may not be able to contribute at all.

For married couples filing jointly, the income limit for full contributions is $167,000, with lowered limits above that, and no contributions above the $177,000 income level.

If you are below the income limit, the maximum contribution is $5000 ($6000 if you're over 50 years old).

Read through the literature for your 401k plan. Sometimes there are fees or other terms for outgoing account transfers. It's always a good idea to know all the rules before jumping right in.

Shop around for a bank or brokerage firm that you like. If there's a fee associated with your rollover, some brokers are willing to pay it for you. It certainly doesn't hurt to ask. If your 401k and the brokerage firm both allow it, you may also be able to transfer your existing mutual funds into your new account.

Your new broker or IRA custodian will give you a few forms to fill out to authorize the rollover. Be sure to fill these out accurately and completely to ensure that your rollover goes as smoothly and quickly as possible.

The best way to avoid potential penalties is to ask for a direct, or trustee to trustee, rollover. Your 401k administrator will probably send you a form to give explicit instructions as to how the check is to be made out. Get this information, in writing, from your new Roth IRA custodian. With the funds being sent directly to your new account, you don't need to worry about taxes or penalties.

If you decide to have the check sent to you, time is of the essence. Remember, once you receive the check, deposit it as soon as possible. You have 60 calendar days (No extensions for weekends!) to get it into your new IRA.  If you don't make it in time, it will be charged as a distribution, and subject to income tax and, if you're younger than 59 ½, a 10% penalty for early withdrawal.

This information is intended as a guide to help better understand the process of rolling over a 401k and the basics of Roth Ira's. You should always talk to your lawyer or financial advisor about your situation, and your own unique needs.