How to Turn a 401k Into a Roth IRA
A 401k plan is an employee-benefit program allowing salary reductions to fund a retirement savings plan. Contributions use pretax dollars, lowering the immediate taxable income of plan participants. A Roth IRA is a tax-free retirement savings account funded with after-tax dollars. To convert a 401k into a Roth IRA, participants must terminate employment and pay income taxes on the amount converted.
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Instructions
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Get your employee termination package with rollover paperwork from human resources. This may be provided to you in an exit interview or by phone request to either your human resources department or 401k plan administrator.
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Open a new rollover IRA at an IRA custodian offering the investments that you want to purchase. As a rollover IRA, no money is needed to fund the account.
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Ask the new IRA custodian representative whether you can do a one-step conversion or if you need to break it into two steps. The IRS gives custodians discretion to roll over money and convert it at the same time. If your custodian requires two steps, obtain the additional paperwork required to complete your conversion.
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Complete the rollover paperwork in your termination package. The rollover paperwork requires contact information, your 401k account information as well as the new rollover account to which the money will be directly transferred. Complete all sections, sign the form and submit it to the 401k plan administrator.
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Call the IRA custodian three to six weeks after the rollover paperwork was submitted to see if the funds have arrived. If they have, submit any secondary paperwork required in a two-step conversion process. If you conducted a one-step process, there is no other paperwork required.
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Tips & Warnings
Internal Revenue Service 2010 regulations allow the income of 2010 conversions added to 2010 and 2011 tax filings. This spreads the income tax owed over two years. Future regulations are contingent on legislative changes but require the converted amount recorded to one tax year, not two.
Consult with a tax professional to make sure a conversion is appropriate for your tax situation.
