Home > How to Manage Money > How to Rollover a 401(k) into a Roth IRA

Last year when our family moved, not only did I leave behind a great job but also a 401(k) account. I basically had four choices of what to do with my account:

1. Leave it at the current investment company.
2. Move the balance to 401(k) account at a new company.
3. Rollover the account to an IRA .
4. Take a distribution of the account balance.

I did what most experts agree you should do with a 401(k) from a past job – Roll it over into an IRA account held by a company with low maintenance fees and good investing options. The receiving brokerage company made the process very easy for me to complete.

Here is what you need to know in order to rollover a 401(k) account to a Roth IRA .

1. Look at what is in your 401(k) account.

Traditional contributions are pre-taxed. You have a choice to rollover these contributions to a Traditional IRA or convert them to a Roth IRA.

Roth contributions will keep the Roth characteristic of being post-taxed and must rollover to a Roth IRA.

Matching contributions made by your company are pre-tax contributions. Like traditional contributions, you have the option to convert them to a Roth IRA.

A 401(k) account could potentially have all three types of contributions. The administrator of your 401(k) account can easily tell you the balance of each type.

2. Figure out tax implications.

An online calculator  can help you decide whether there are benefits to pay the taxes on those traditional contributions and matching funds now and convert them to a tax-free growing Roth IRA .

The decision to convert to a Roth IRA is based on your current tax situation, your best prediction of your future tax situation, and your other assets. You should also have the ability to pay the taxes that will be due when you file for the conversion year.

Consult your financial advisor or tax professional if you have any additional questions about whether a conversion is right for you.

3. Decide where to rollover your 401(k).

You may have investments and other IRAs with a brokerage or mutual fund company. This is the first place to consider when rolling over your 401(k).

There are advantages to having your assets in one place – like lower fees for higher asset holdings. Another benefit is that its much easier to keep tabs on things on one website or account statement. Tax time is also easier with less 1099s to track down.

If you dont have a personal investment account anywhere, do your homework before deciding which bank or company to use. Be sure to research:

• Minimum balance to open an IRA account.
• Any required ongoing monthly IRA contributions.
• Investment options.
• Fees or commissions on account balances and transactions.
• Reputation.

4. Decide if you want to combine with other IRA contributions.

Combine with old account: You may already have a Roth IRA account. Your 401(k) account can be converted and rolled into this existing account.

Open a new account:  You may decide to keep your 401(k) account separate from any other Roth IRA accounts.

A Certified Financial Planner recommended keeping the employer-based contributions separate from self-contributions to an IRA account due to a complexity in tax laws at distribution time. Because of this advice, I decided to keep my 401(k) rollover separate and apart from any past or future IRA contributions.

5. Figure out the steps for a rollover.

You will need to have an account number for the 401(k) balance to go into. If its an existing account, you will already have an account number. If you want to open a new account, the receiving company will issue you a new account number for a Roth IRA without any opening deposit because they will be receiving the 401(k) account balance.

Contact the 401(k) administrator to get the paperwork to complete a 401(k) rollover. You can expect a small fee to be deducted from the account balance before sending it electronically to the Roth IRA. My fee was $50.

6. Avoid common pitfalls.

I mentioned that I had four options with my old 401(k) account. The rollover was the only logical choice. Heres what you shouldnt do:

Do not leave it. Most 401(k) administrators offer a limited choice of investment options and have higher fees. You could easily lose track of this separate account.

Do not move the balance to a 401(k) account at a new company. See above on 401(k) administrators. You also might not have this choice if you dont continue working or the new job doesnt offer a 401(k).

Do not take a distribution:  It might be tempting to ask for the account in cash – either because you think the balance is so low it doesnt matter or you need the cash for other reasons.

Your 401(k) company will take 20% for the IRS because the traditional contributions and matching funds will be considered income. If you are under 59 1/2, there is also a 10% early distribution penalty. See the damage on this calculator .

Every dollar counts when saving for retirement. A 401(k) account with a small balance is still an opportunity for your retirement savings to grow. If you have other pressing cash needs at home, find another way to fix that problem.

Do not request a distribution check to send to your new IRA account:  Your rollover needs to be electronic and not with a check.

If you request a check from your 401(k) company, they will automatically take out 20% from the traditional contributions for the IRS – even if you tell them you going to deposit it in an IRA account. Youll have only 60 days to open a Roth IRA or incur the 10% early distribution penalty. Why make this more difficult than necessary?

Life gets busy when moving or changing jobs. Dont forget about your 401(k) and leave it behind! Its not that difficult to rollover your 401(k) to a Roth IRA.

Do you have any questions about rolling over a 401(k) into a Roth IRA? Leave a comment! Have an answer to a comment? We appreciate your replies!