QUESTION: will get a distribution from a company 401k defined contribution retirement plan that has been terminated. Can I rollover this money into a self-directed Roth IRA LLC directly or do I have to roll it into a traditional IRA first?
Peter C. in Texas
ANSWER: Good question. Yes the rules permit the direct rollover of pretax amounts from a defined contribution plan such as a former employer 401k to a Roth IRA because a 401k is considered a qualified plan. When you complete the former employer’s direct rollover forms, it will have a direct rollover to Roth IRA option. It’s important to understand that the funds would need to be processed as a direct rollover instead of a rollover.
Direct Rollover vs. Rollover
Direct Rollover: When 401k pretax funds are directly rolled over to a Roth IRA, the check is made payable in the name of the IRA custodian for the benefit of the participant’s Roth IRA. The direct rollover from the 401k to the Roth IRA is reported by the former employer 401k provider on Form 1099-R in box 7 by entering code “G”. The Roth IRA custodian then issues a Form 5498 in the year following the direct rollover and reports the direct rollover from the pretax 401k to the Roth IRA in box 2 (rollover contributions)
Rollover: When 401k funds are processed as a rollover, 20% is withheld for tax, the check is made payable in the IRA participant’s name, and the participant may not rollover the funds directly into a Roth IRA but rather a traditional IRA and the processes a Roth IRA conversion. Thus it is timelier to process a direct rollover from a pretax 401k to a Roth IRA since the funds can be directly deposited to the Roth IRA.
Lastly, once the Roth IRA has been funded you can invest the Roth IRA in the self-directed Roth IRA LLC.
For a list of items to consider when working with your self-directed IRA LLC facilitator, click here.