401(k) to Roth IRA Conversion: A Comprehensive Guide

It is very rare today for a person to stay with one company through their entire career. You may be one of the many who have left their place of employment and are trying to figure out what to do with their 401k retirement plans.

Most companies will only give someone a few months to make arrangements to move their retirement plan assets, and transferring a 401k can be a real headache if you are not sure what to do.

Feel free to follow these simple steps to make the conversion from 401k to Roth IRA if that’s what you choose to do.

Eligibility

Everyone is eligible to convert a 401k to a Roth IRA. The government recently got rid of its income limitations which made people who had taxable income amounts greater than $100,000 ineligible for a rollover. You can take advantage of that limitation lift right now.

Opening a Roth IRA

Your first step is to open up a Roth IRA account. You can do this at any bank, broker, or other financial institution. I personally use Fidelity.com. Inform the financial institution that you are rolling a 401k over to a Roth IRA. This way, you can make sure that you get the appropriate paperwork or online forms. Then, just fill out the forms so that your new account is ready to receive your assets.

Contacting the 401k company

Your second step is to contact the company that manages your 401k. Inform them that you would like to do a direct rollover of your 401k to a Roth IRA. You will have to fill out some more forms to authorize the transfer request. Ask them to forward the check or echeck to the firm handling your Roth IRA. This way, it is not viewed as a redemption request but as a rollover of assets, which lowers your tax liability.

Pay the Taxes

Please remember to be prepared for the tax impact of converting from a 401k to a Roth IRA. You will have to pay taxes on the amount of money that you are converting since a 401k plan enables you to invest pre-tax money. Roth IRAs are funded by post-tax cash. You will have to pay the taxes you had “skipped” since you never paid the taxes on the contributions and earnings in the 401k.

Other Options

Before converting your 401k to a Roth IRA, remember you have other options. You could transfer the 401(k) from one company into the 401k account of a new company. You could also consider converting to a traditional IRA to avoid the tax hit since traditional IRAs operate similarly to 401k’s when it comes to taxes.

Overall, the biggest step is doing something with your 401k. Choose whichever option works best for you and your family. I personally will be leaving my 401k with my current company when I start working full-time from home. I only have that option since I’ve been at my current company for more than five years. You will need to check with your current company to see what all of your personal options will be.

Have I missed any important steps?

Crystal Stemberger

Crystal Stemberger writes about finding the balance between paying the bills, saving for the future, and budgeting for the fun stuff at the aptly-titled Budgeting in the Fun Stuff.

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