How to do a Roth 401k rollover

How to do a Roth 401k rollover

Seeing as how the Roth 401k has only been around for a little over a year and a half, there isn’t a lot of information out there about rolling these things over. I have a Roth 401k at a previous employer and while the fees and funds are very acceptable at the previous employer I just want total control over my choice of investments and want to consolidate some of my accounts, so I will be rolling over my Roth 401k into my existing Roth IRA.

Step 1
The first thing you need to check is if the brokerage you want to transfer to is able to complete this type of transaction. Like I said Roth 401ks are very new and when I left my job at the end of January I checked with about 5 different discount brokerages and NONE of them offered rollovers for Roth 401ks at the time. However a check at the end of May resulted in me finding out that nearly all of those brokerages do in fact offer the rollovers now. What a difference 3 months can make.

Word of caution: when asking brokerages if they do in fact offer Roth 401k rollovers many of them by reflex will only see 401k rollover and say yes. Almost all of the brokerages I checked with in February said yes initially, it wasn’t until I verified with them that they caught the Roth part that they said they did not offer that service at this time.

Step 2
The second thing to take into account is whether you want to roll your 401k into a Rollover IRA or an normal IRA. If you roll your 401k into a Rollover IRA and do not try to contribute funds to this IRA down the road, in other words keep it with just your rolled over money, you have the option in the future if you so choose to roll that Rollover IRA into a company sponsored plan down the road. However if you roll it over into an existing IRA that you make your normal IRA contributions to or decide down the road to use your Rollover IRA as your normal IRA you will be forced to keep it in a IRA type account forever. This is because it’s hard enough for brokerages to keep track of what’s what as it is. I probably don’t need to say this, but will just for the sake of completeness. Roth 401ks can only be rolled over into Roth IRAs or Rollover Roth IRAs and Traditional 401ks can only be rolled over into Traditional IRAs or Traditional Rollover IRAs.

Step 3
Ok so step 3 is to identify what type of account you are going to rollover your 401k account into based on the information on step 2. So if you don’t have an existing IRA or decide that sometime down the road you might want to roll this money back into an employers 401k you are probably better off creating a new Rollover IRA (in my case Roth) with a brokerage. Once your account is setup and you have an account number you are ready to move onto step 4.

Step 4
Step 4 requires you getting the plan information from the company/brokerage that holds your previous 401k. In my case I needed to contact my previous company’s HR department and they sent me the necessary forms. I’m sure every form is different, but basically the key thing is you need to tell them that you want to transfer this money to the Rollover/IRA that you identified in Step 3. On my form I simply had to fill out the name and address of the financial institution I wanted the funds transferred to as well as the account number that the funds would be going into.

In my case they will liquidate all of my funds and cut a check with my name and the financial institutions name on it and mail it to the financial institution. I have never done this process before and am currently at the form filling out phase, but a buddy of mine just did a rollover and the whole process took about 3 days. Also in my case I actually have a Traditional 401k and a Roth 401k with my previous employer so I will actually be doing two rollovers to get the money out.

Another thing to note: You cannot rollover a 401k until you leave the employer that the account is with. If anyone is curious the brokerage I am using is Scottrade. I have been with them for 3-4 years now and have been very happy with them. The only knock against them that I have is that they do not offer free dividend reinvestment for stocks (although they do for mutual funds). The biggest reason I am transferring everything to them though is that they were the only brokerage where I felt completely comfortable that they knew what I was talking about with my various rollover questions and when doing rollovers like this the last thing you want is a mistake and the HUGE headache of trying to straighten it out if they do the rollover wrong.

Anyway these are my notes so far. If I learn anything new I will update this post, otherwise hopefully this is helpful for someone else going through this process.