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Step 1
Make the decision to roll over a 401k into a Roth IRA when you change jobs. You may not be required to move your 401k money, but rolling it over allows you to avoid higher fees charged to former employees still participating in 401k plans. Many people also like to roll over their money so that they cut all ties to the former employer and have more control over the funds.
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Step 2
Figure out whether it makes sense to roll over your 401k into a Roth IRA. You may not be eligible to open a Roth IRA if your 2008 income is more than $116,000 for single filers and $169,000 for married and joint filers. If you make too much money you will need to roll over to a traditional IRA. This is a less attractive option since earnings will be taxed upon withdrawal after retirement. The Roth IRA exempts many from paying taxes on redemptions.
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Step 3
Decide how to invest the Roth IRA. Most investors roll it over to a mutual fund, however you can also designate bank accounts and stocks as Roth IRAs. It's important to note that "Roth IRA" is a tax designation not a specific type of investment. You can choose how to invest the money in your Roth IRA. Mutual fund companies aggressively market themselves as roll over specialists. hey desperately want you to invest with them and make the process easy. Well known mutual fund companies include Fidelity, Vanguard and T. Rowe Price.
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Step 4
Call the investment company of your choice and ask to speak to a roll over specialist. The IRA roll over business is so lucrative that most companies have entire departments devoted to making it easy for you. They will set you up with all the paperwork. All you need to do is tell them where the money is now and give them permission. Tell them how you want the money invested. They will send you the forms to sign or you can fill them out on the Internet.
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Step 5
Ask the company opening up your new Roth IRA to contact the company currently holding your 401k money. Many times they will work with each other and you wont have to do a thing. You may be required to contact them yourself and fill out forms authorizing the roll over. This process may take a few weeks. Some companies make this process more difficult than others to discourage you from withdrawing your funds. Be firm. It is your money and it's your right to do what you want with it.
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Step 6
Understand the tax consequences of a 401k to Roth IRA rollover. The money in a 401k has not been taxed. Money in a Roth IRA is post-tax. When you move from a 401k to a Roth IRA, it is considered a redemption then a contribution. That means taxes must be paid on the 401k money. This can be a considerable amount if your 401k is large. However, the long-term tax savings can be much more. The money is allowed to grow tax free in the Roth IRA until you withdraw it. If you have a long time until retirement, this is a huge financial benefit.
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Step 7
Forward the check. The 401k company may require you to receive a check for the funds. This should be made out to the Roth IRA company. Forward the check to them as soon as you receive it.
