- 1). Find an IRA custodian that meets your investment objectives. Banks offer conservative savings programs, whereas brokerage firms offer more growth-oriented options such as stocks, bonds and mutual funds. Ask the custodian whether you can roll over the 401(k) directly into a Roth IRA--the IRS allows this, though not every custodian has protocol in place to do it.
- 2). Open the rollover IRA account. If the custodian requires the rollover to first go into a traditional account, open a traditional rollover IRA as well as a new Roth IRA. Complete the conversion paperwork and any required transfer paperwork for the custodian, providing a copy of your 401(k) statement for account verification.
- 3). Request a rollover package from the 401(k) administrator. If the package is not in your employee exit paperwork, you can obtain the forms by calling the customer-service number on the 401(k) statement.
- 4). Complete the rollover paperwork using the information provided by the new rollover account custodian. A direct rollover sends the money directly to the new IRA custodian without any federal tax withholding. An indirect rollover sends you a check for the 401(k) value, less 20 percent automatically withheld. To avoid being charged early-distribution penalties and taxes, you must deposit the check, and add the 20 percent back into the rollover IRA, within 60 days to complete the indirect rollover.
- 5). Confirm with the new custodian that the rollover money has been received and that the conversion has taken place.
- 6). Obtain IRS Form 1099-R and IRS Form 5498 in January following the conversion. Form 1099-R is sent by the custodian stating how much was liquidated for the conversion. Form 5498 states how much was converted into the Roth.
- 7). Take the value in Box 2a, Form 1099-R (taxable distribution) and divide this by two. The 2010 IRS regulations allow you to add the converted amount to gross income over two years, reducing the tax hit in any one year.
- 8). Add the value (half of the converted amount) to your gross income by recording it on Line 15a, Form 1040. Record this amount when filing taxes in 2011 and again in 2012. You will not receive a second 1099-R, so make a note in your tax files to report this income.
- Advertisement -
- Advertisement -