Ways & How

How to Roll Over 401k to Roth IRA

How to Roll Over 401k to Roth IRA

Most employees have 401k retirement plans since their employers match their contributions by 50 percent. However, some people consider rolling over their 401k balance to Roth IRA because of the benefits of the latter. In essence, both 401k and Roth IRA are retirement savings accounts, but the biggest difference is when the contributions get taxed. Contributions are not taxed for 401k plans, but every withdrawal you make is. It is the other way around with a Roth IRA; every contribution is taxed, but withdrawals are not, allowing your investment in Roth IRA to grow tax-free. If you think that you can benefit more from Roth IRA, find out how to roll over 401k to Roth IRA:

  1. Open a Roth IRA account. Before you can roll over your 401k plan to Roth IRA, you need to open a Roth IRA account with a provider, such as a financial institution, bank, or brokerage firm. Some of the things that you need to consider include startup and account fees, investment choices, funding options and locations, and tools to make deposits easier. For the initial rollover, you need cash vehicles like money market funds and deposit accounts, which can serve as your initial investment of choice.

  2. Roll over your 401k to a traditional IRA. Your Roth IRA provider will ask you to fill out forms to do so. Although some programs allow you to roll your 401k directly to a Roth IRA, it is still typical for most transfers to pass through a traditional IRA first before the funds are converted into a Roth IRA.

  3. Roll over your traditional IRA to a Roth IRA. Finally, you need to fill out documents that allow you to convert your IRA into a Roth IRA. Initially, you still have to pay the full amount of income tax for the conversion using your marginal income tax rate for the current year. But after that, all your remaining contributions after you turn 59.5 year old will be tax-free. You can also start withdrawing your converted Roth IRA contributions without tax and penalties even earlier, provided that you let your investment grow in the Roth IRA untouched for at least five years.

  4. Start investing in your Roth IRA. Now that you have successfully rolled over your 401k retirement plan into a Roth IRA, you can start investing based on the investment method that you deem fit. Aside from deposit accounts, your other options include stocks, bonds, and mutual funds. As for your contributions, you can do them annually, with the amount depending on your contribution limit. Follow the specific instructions that your Roth IRA provider tells you.

Remember that you can start rolling over your 401k to Roth IRA only when you are no longer working for the employer that sponsors your 401k retirement plan since you will be penalized. However, some Roth IRA providers might allow you to roll over into a Roth IRA plan if you are already 60 years old or older, even if you are still employed. It is very important to consider your retirement age before going through the steps of how to roll over 401k to Roth IRA. You need to make sure that this is the right step for you since not all people can benefit from a Roth IRA.


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