How to Rollover Your 401k to a Roth IRA

When you’re saving for retirement, you want to get the most out of your investments. For some, this involves looking to convert investments from one account to another to collect higher returns or avoid a tax penalty. Read on to learn about converting a 401k to Roth IRA.

Expand Your Investment Options

A 401k is a common retirement investment program. Many employers offer this program for their employees, and becoming part of the 401k program is a standard benefit that new employees sign up for on day one. But 401k investments don’t offer the high return potential some other retirement accounts do. That’s why converting from a 401k to a Roth IRA is a popular choice.

Switching over to a Roth IRA allows you more investment options than staying in a 401k account. The Roth IRA also gives you, the account holder, greater control over your investment than what you have if you remain with your 401k.

Avoid Tax Loss

Another benefit to rolling over your 401k to a Roth IRA is that you receive tax benefits for doing so. Income contributed to a Roth IRA is contributed pre-tax, so you don’t need to pay income tax on the money you invest. If you’re many years from retirement and don’t plan to withdraw any money from your retirement account in the near future, you can enjoy the compounding tax benefits from years of investment in your Roth IRA account.

Rules for Rollover

Of course, if you decide to convert your 401k to a Roth IRA, you do need to adhere to certain rules or risk incurring penalties. For one, you need to stay within a Roth IRA account that’s considered a qualified, in-plan program. You can work with a financial professional to determine which Roth IRA investment options you qualify for.

To avoid incurring tax penalties, you need to do a trustee-to-trustee transfer. You also need to account for previously taxable funds you add to the IRA, since they won’t be tax-exempt, like your other contributions are.

Avoid Common Penalties

There are some rules for withdrawal that will incur serious penalties for breaking. If you withdraw funds within five years of conversion, you will incur a 10 percent penalty. Similarly, if you are under age 60, make withdrawals at any time and don’t qualify for exceptions, you may incur the same 10 percent penalty.

Determine if a Roth IRA Rollover Is Right for You

Ultimately you have to determine whether rollover to a Roth IRA is the best decision for your retirement planning. You can speak with a company representative or independent financial advisor to decide to proceed with the conversion process. If converting to a Roth IRA is the best decision for your retirement, take care to follow the conversion rules and avoid possible penalties.