What are the Best Tips for a Roth 401k Rollover?

Some of the most helpful Roth 401K rollover tips cover such topics as choosing the type of account into which you will move your funds. Choosing a new 401K may be beneficial, for example, if you are concerned about the five-year rule for taking qualified distributions, which aren't subject to taxes or penalties, once you have reached 59 and a half years of age. Tips regarding the timing of these rollovers can be important as well. In most cases, it is viewed as optimal to allow trustees to handle the rollovers; if you choose to have a check sent to you instead, you must complete the transaction within 60 days.

One of the most important tips for a Roth 401K rollover is to choose the type of account into which you will roll over the 401K carefully. If you choose to roll over a Roth 401K into a new Roth 401K, the time you held the original Roth 401K counts toward the five-year requirement for early distributions. This five-year rule says that you can take qualified distributions from your account once you’ve reached 59 and a half years of age and have held the plan for at least five years.

If you have a Roth 401K and wish to roll it over to a Roth IRA, the IRS won’t count any of the time you held the Roth 401K toward its five year rule. This means if you have reached 59 and half years of age and held onto your Roth 401K for 10 years, it won’t count toward the five-year rule for qualified distributions. You will have to wait an additional five years if you are opening a new Roth IRA. If you roll the funds into a Roth IRA that has been open for at least five years, however, you won’t usually have to worry about a waiting period.

Another tip for handling a Roth 401K rollover involves the manner in which the transaction is handled. Many financial experts recommend allowing the trustees for both the original and the receiving account to handle the rollover transaction. In most cases, handling a transaction this way leaves less room for error or delays. This is important because a Roth 401K rollover that is not completed within 60 days is treated as a distribution. In such a case, you will typically face taxes and penalties.

You may decide to receive the funds from a Roth 401K rollover in check form. For example, you may take this option if you want to give yourself a short-term loan. In such a case, however, it is critical that you deposit the funds in the receiving account before 60 days have passed to avoid penalties.