How to do a 401k rollover to a Roth IRA - Step-by-Step

How to do a 401k rollover to a Roth IRA - Step-by-Step

People with 401k plans who are leaving their employer have the option of rolling their 401k into an individually owned IRA or Roth IRA.

People who leave their jobs have several options when considering what to do with the assets in their 401k plans. They can:

· Leave them with their previous employer, if permitted

· Transfer them to their new employer's 401k, if available

· Roll them over to a traditional IRA or to a Roth IRA

· Cash out (withdraw the assets entirely)

1. Open a traditional IRA account and a ROTH IRA account

Assets from a regular 401k plan cannot be converted directly into a ROTH IRA. They must first be transferred from the 401k into a traditional IRA and then converted to a ROTH IRA. Therefore, you should open a traditional IRA account as well as a ROTH IRA. You can use existing accounts if you have them or create new ones. They can usually be created online and do not need to be funded right away. These accounts will need to be set up in order to begin the transfer process.

The ROTH IRA account is where you will ultimately manage your assets, so select a custodian that offers you the selection of investments that will meet your objectives and offers favorable fees. You can shop among different custodians for the best fit.

2. Request a Direct Rollover from the 401k plan to the traditional IRA

The next step is to contact the current 401k plan administrator to request a direct transfer of funds to your traditional IRA. The plan administrator will provide forms for a direct transfer, where you will need to identify the account and the new custodian.

Complete the transfer forms and submit to your 401k administrator. Be sure to fill the forms out correctly and provide all the necessary information. If in doubt, discuss with the 401k provider. You want to make sure that the request is for a transfer rather than a withdrawal. Your form may also ask for specific wire instructions for the IRA custodian.

3. Convert the traditional IRA to a ROTH IRA

Once your assets have arrived in the IRA account, you can affect a conversion to the ROTH IRA account. You will essentially be using the "Backdoor ROTH conversion" process allowed for converting traditional IRAs to ROTH IRAs.

4. Select your investments

Once your assets have been transferred to the ROTH IRA, you are free to reinvest them as you wish and if you keep the assets in the ROTH for at least five years, you can ultimately withdraw them tax free.

Be aware, though, that you will also have to pay the tax on those assets in the year you converted.

ROTH IRAs are generally self-directed accounts. Investing sites such as SeekingAlpha.com offer many tools and resources such as company financials or ratings for analyzing and selecting securities.