How to Roll a 401(k) Into a Roth IRA

401(k) plans are employer-sponsored retirement plans that allow employees to save for their retirement and receive matching contributions from the company. Once an employee leaves a company, he can roll his 401(k) into other retirement savings accounts such as IRAs and Roth IRAs. IRAs are taxed like 401(k)s in that their contributions are deductible from your earnings and all distributions are taxable. Roth IRAs are funded with after-tax dollars and all growth and distributions are income tax free.

Difficulty: Moderately Easy

Instructions

1. Pick a custodian for your new Roth IRA. This custodian can be a bank or mutual fund company. You typically want to use cash vehicles such as deposit accounts or money market funds for the initial rollover.

2. Fill out the paperwork to roll your old 401(k) into your new traditional IRA. You first need to roll your 401(k) funds into a traditional IRA before you can convert these funds into a Roth IRA.

3. Fill out the Roth Conversion paperwork to turn your new IRA into a Roth IRA. You will need to pay income taxes on the full amount in the current tax year at your marginal income tax rate.

4. Invest your new Roth IRA as you see fit. Now that your new Roth IRA is funded, you can invest the funds into the investment vehicle of your choice.

Tips & Warnings

• A Roth conversion or any rollover can only be done once the 401(k) participant is no longer working for the company that sponsors the 401(k).
• Don't forget about the tax bill that will come due next April 15th.

References

• Roth Conversions