Reinvesting an IRA can open up the possibility of switching to a Roth account. This type of account offers more investment options, lower fees and costs, and the option to convert to a Roth account. If you have a Roth 401(k), a Roth IRA is the preferred reinvestment option. Plus, you don't have to make the required minimum distributions (RMD) at age 72 or ever from a Roth IRA. In most cases, transferring your old 401k to a new company 401k is not recommended.
You won't have access to your funds and you'll have very limited investment options. It's best to transfer it to a traditional IRA instead. You can't transfer 401k (unless it's a Roth 401k) directly to a Roth IRA. You must first transfer it to a traditional IRA and then convert the traditional IRA to a Roth IRA.
This will be a taxable event, so be sure to check with a tax expert. The differences between a 401K and a Roth 401K are almost the same as the differences between an IRA and a Roth IRA. So how does it work? Can you pay taxes with the existing balance so that your current cash is not affected (for example, if the 401k withholds 20% and only 80% goes to the IRA)? Or would you have to pay a 10% penalty on the tax part? It may make sense to reduce levels of taxable income through traditional 401k contributions. If you currently earn $70,000 a year, but contribute to your current $401,000 and, since married people have a joint exemption, you pay taxes on about $50,000. When filing taxes with one of the well-known tax programs, it may say that you have to pay taxes on the amount of direct reinvestment of $401,000 to a Roth IRA, but other well-known tax software may not consider this amount of reinvestment for tax purposes. If you're 66 years old, retired and thinking of transferring your $401,000 to your Roth IRA (which you opened some time ago) over a period of years, to minimize the fiscal impact, consider converting just the $130,000 amount into a Roth for which you're willing to pay taxes for, and then moving the rest to a traditional IRA where you won't have to pay taxes for the renewal. If you don't have an existing Roth IRA and need to establish one for reinvestment, the five-year period begins the year the new Roth IRA is opened, regardless of how long you've been contributing to the Roth 401(k). You can first move the 401k other than Roth to a traditional IRA and then perform the conversion, but that just adds another step. If you receive a distribution check from your 401(k) transferred to a Roth IRA, it's very likely that they'll keep around 20% for taxes.
Transferring the 401k Roth to a Roth IRA will be simple and will not implement the five-year rule since it is a transfer from Roth to Roth and not a conversion. Depending on your tax bracket (which should be low if all your income is from Social Security), you might want to transfer the 401k to a traditional IRA. During direct reinvestment, if your employer's former plan administrator didn't withhold any money and transferred all the money from the 401k to the Roth IRA, it's possible that no taxes will be due. If your employer offers a Roth 401k and you were smart enough to participate in it, then transferring funds will be much easier. Regardless of how much profit you make, it's important that you make reinvestments strictly following all rules in order to avoid an unexpected tax burden.
