Most employers offer investment benefits to their employees as an incentive to remain employed at that company. One of the most popular of these employer-offered investment vehicles is 401(k), which allows employees to earn assets in addition to their income. Many times, an employee will want to convert his 401(k) to a Roth IRA to take advantage of certain tax breaks as well as adjust his allocation of investment money to funds.
Step 1
Confirm that you are eligible to switch your 401(k) to a Roth IRA. You must have a gross income of no greater than $100,000 as of January 2010. If you are ineligible in a given year, you can always wait to convert your 401(k) until you reach a year where your income drops below this threshold.
Step 2
Make sure you are choosing the right time to convert your 401(k). Most employees choose to keep their 401(k) until retirement because they can put more money into this account than a Roth IRA. They choose to convert it to a Roth IRA to have better control over the investments and enjoy the tax breaks on earnings that come with a Roth IRA.
Step 3
Open a Roth IRA account with an investment manager or bank. Be sure to find an account manager with low fees relative to other providers. You may want to inquire with multiple businesses to find the situation that best suits you. Explain to your account manager that you have a 401(k) account you would like to convert to a Roth IRA.
Step 4
Fill out a transfer or conversion authorization form with the account manager of your 401(k). This document will serve as paper evidence of your desire to convert the funds, reducing the risk of your account being hijacked.
Step 5
Set aside funds to pay for the 401(k)'s income tax. This income tax will come due once you make the conversion and will take a sizable bite out of your 401(k) funds. You can put this money into a high-yield savings account or other short-term investment vehicle to safeguard these funds. You do not want to put these funds into the Roth IRA because you will otherwise have to pay a 10 percent early withdrawal fee when the funds are taken out for taxes.
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