If you are enrolled in an existing 401(k) plan, then should you leave your present employment you are presented with the issue of whether to transfer your 401(k) to a Roth IRA or whether to leave the 401(k) it with your former employer. The former employer is entitled under law to charge a higher management fee to maintain the 401(k) plan for former employees. There are several benefits of such a transfer, which includes having far greater control on how the funds are invested, lower management fees and consolidated accounts making asset allocation decisions easier. Furthermore, if you have more than one former employer where you have an existing 401(k) plans, then there is even more good reason to consider consolidating them into a Roth IRA.

401k Rollover to Roth IRA can be a good idea if you bear in mind the tax consequences. A 401(k) plan is funded from gross income, not taxed income, whereas a Roth IRA only receives taxed income. To account for this difference, the IRS levies some taxes in order to re-balance things from a tax perspective. Therefore, you will need to pay for this tax cost in that current tax year, and depending on the size of your balance being rolled over, this cost could be substantial.

Once this is factored into your calculations and you have decided you still wish to go ahead, then you will need to find a home for your Roth IRA. Stock brokers, banks and mutual fund families can all act as hosts for your Roth IRA. Fees and offerings will vary from provider to provider, so check the terms carefully. The financial institution that will host your Roth IRA needs to be informed that you are planning to rollover a balance from an existing 401(k) plan. Your 401(k) sponsor will also need to be instructed to commence the rollover to your new Roth IRA and you will need all the appropriate details to hand for all parties involved in the move.

A Roth IRA withdrawal is expensive prior to the retirement age of 59½. It is best avoided if at all possible. Similarly, you will want to determine if a rollover from a 401(k) to a Roth IRA is in your best financial interests. This will depend largely on your personal circumstances and plans for the future.