How to Convert a 401k to a Roth IRA

There are several rules you must follow when you convert a 401k to a Roth IRA. The Internal Revenue Service has very strict regulations regarding who can perform a 401k-to-Roth IRA rollover and how it is to be done. It is important to follow all of these regulations so the money in your employer-sponsored 401k plan can be moved to a Roth IRA account without suffering any tax consequences.

Step 1

Determine if you are eligible to convert a 401k to a Roth IRA. The IRS only lets taxpayers who meet certain income requirements do so. A taxpayer's modified adjusted gross income must be $100,000 or less. Your MAGI is the figure on your tax return that is actually subject to tax. It is what is left over after all of the deductions and credits are subtracted from your gross income. If your MAGI is more than $100,000, you cannot perform the rollover during that tax year. It is possible to perform the conversion in a later tax year if your MAGI drops below $100,000.

Step 2

Perform the 401k-to-Roth IRA conversion at an appropriate time. Most taxpayers do it when they stop working for the employer that is hosting their 401k plan. This makes sense if you want to have more control over your retirement investments. However, most 401k plans allow you to keep your money in them indefinitely. Investors always have the option to roll over their 401k to an IRA anytime after leaving a workplace. There is no time limit. This makes sense if the taxpayer is waiting for a tax year when she is eligible for a Roth IRA rollover. The only time it does not make sense to convert 401k money to a Roth IRA is if you are still participating in the 401k plan.

Step 3

Set up a Roth IRA account. If you already have a Roth IRA, you can use that. If you don't, you must establish one. Most major financial institutions sponsor Roth IRA accounts--including banks, stockbrokers and mutual-fund companies. Most investors choose mutual-fund companies like Fidelity, Vanguard or T. Rowe Price, because they have "no-load" funds with low fees and offer a wide range of investment options. Tell the financial institution that you want to convert a 401k to a Roth IRA. It will send you papers to fill out and sign.

Step 4

Contact the holder of your 401k and tell them you want to "roll over" your account to a Roth IRA. Most will make you read a document, then fill out authorization papers. Sign the papers and send them back. Be sure to clearly state where you want the 401k money sent and that you want a "rollover" and not a redemption.

Step 5

Ask the holder of your 401k to send the money directly to the Roth IRA account. Some financial institutions will do this so you never have to touch the money. However, many financial institutions won't; instead, they send you a check. Make sure this check is made out to the Roth IRA account and not you. If it is made out to you, it will be considered a redemption and you will be forced to pay taxes on the money plus a 10 percent penalty. If the check is made out to the Roth IRA account, all you have to do is forward it to the financial institution holding your Roth IRA. Your 401k-to-Roth IRA conversion is complete.