How to Convert a 401(k) to an IRA

Are you confused about how to convert your 401(k) to an individual retirement account (IRA)? Many people have faced this same dilemma at one time or another, so you’re not alone. Use this short guide to rolling over your 401(k) for all the basics you need to know.

Deciding on an IRA: Traditional vs. Roth IRA

Before getting started with your 401(k) to IRA conversion, you need to figure out the type of IRA you want: traditional or Roth. The difference between them essentially boils down to when your money gets taxed. With a traditional IRA, you can take advantage of a tax deduction the year you make the contributions. With a Roth IRA, you won’t get taxed on your withdrawals during retirement.

To choose the one that works best for you, consider what your tax rate will likely be during your retirement. If you think it will be on the higher side, a Roth IRA’s delayed tax benefits could be a good choice, notes NerdWallet. On the flip side, if you expect your tax rates to be relatively low, consider taking advantage of the upfront tax advantages of a traditional IRA.

Check Your Eligibility

Are you leaning toward converting your 401(k) to a Roth? Before you get too invested in the Roth vs. traditional IRA decision, double check our eligibility, which could take the choice out of your hands. For example, NerdWallet points out that in 2019, the IRS rules dictate that single people making $137,000 or more aren’t eligible for a Roth IRA.

Choose an IRA Provider

Ask yourself this: How involved do you want to be in managing your IRA? If you’d rather let your provider do all the heavy lifting, look fora robo-advisor to build you a personalized portfolio based on information you provide about your preferences and then regular rebalancing of those funds without you having to choose your individual investments. If you prefer doing your own research and buying and selling low-cost investments yourself, look for an online broker that gives you access to lots of options with low commissions and other fees, as NerdWallet suggests.

Open an IRA Account

Before you can convert your 401(k) to an IRA, you need to open an account with the provider you’ve chosen. Simply contact the bank or brokerage you’ve chosen to open your account. notes that setting up online accounts is straightforward, simple and quite easy.

Initiate the Rollover

Now that you know how to convert your 401(k) to an IRA, it’s time to get rolling. Contact your 401(k) plan’s administrator and request a direct rollover. NerdWallet recommends doing this, which means that the check from the 401(k) will be made directly to your IRA instead of you, which minimizes potential tax consequences. All that’s left now is to pick your investments or complete your portfolio preferences depending on the type of IRA you’ve chosen.