How To Transfer A 401(k) To A Roth IRA in 2024

SHORT ANSWER: A 401(k) to Roth IRA conversion can help you benefit from a Roth's tax-free growth long term. Find the steps to make the transfer below. 

If you’ve held onto an employer-sponsored 401(k) plan for a long time, chances are you’ve accumulated a fair-sized nest egg for your retirement savings. If you leave your job or retire, do you know what you do with your 401(k) balance? 

You have options, which include rolling over your balance to a Roth IRA. That decision could play a pivotal role in saving you money in the long term. However, it's essential to understand how to execute a rollover and where to transfer your 401(k) balance.  Learn how to transfer 401(k) to Roth IRA below. 

What Is the Difference Between a 401(k) and a Roth IRA?

Both 401(k) and Roth individual retirement account (IRA) plans are similar in that they are defined contribution plans. That means that they allow plan holders to contribute a predefined maximum amount toward retirement savings each year. 

The amount allowed depends on several factors, including the type of plan and your income. In both instances, investments grow tax-sheltered within these accounts. However, there are a few differences between these two retirement planning tools.

A 401(k) has higher contribution limits than an IRA. You'll put pre-tax income into the account, which will grow tax-free. Then, when you make withdrawals at retirement, you'll pay your current tax rate on the withdrawals. For high earners, this can lead to significant tax savings as retirement income is often lower and thus taxed at a lower rate.

You deposit after-tax dollars into a Roth IRA. Those funds grow tax-free, and you can make withdrawals tax-free. 

Unlike a traditional IRA or traditional 401(k), a Roth IRA doesn't require you to take minimum distributions when you reach age 59 ½. Some companies offer Roth 401(k)s.

In the traditional 401(k) vs. Roth IRA table below, you'll find a summary of the most significant differences between a traditional 401(k) and a Roth IRA:

Traditional 401(k) vs Roth IRA

Why Transfer to a Roth IRA?

Rollovers happen when you move savings from an employer-sponsored 401(k) plan into a Roth IRA. They can occur as a result of employer-sponsored plan rules barring ex-employees from participation or as a result of your own desire to exert more control over your retirement savings. Other reasons to consider a Roth IRA rollover or transfer:

• Typically, IRAs have greater investment options than employer-sponsored 401(k) plans.
• Most 401(k) plans have strict rules regarding when and how and what to buy, sell or hold; IRAs, especially self-directed ones, free you from such restrictions.
• Unlike a traditional 401(k), contribution and earning (interest, dividends, distributions) withdrawals from Roth IRAs are tax-free.

Most importantly, some employer plans may charge higher fees for ex-employees to continue participating, while some 401(k) plans may only offer restricted (high-fee) investments. A well-planned 401(k) rollover to a Roth IRA could save you money in the long run.

How to Transfer 401(k) to Roth IRA in 4 Steps

Here are the steps to take to transfer a traditional 401(k) to a Roth IRA in four simple steps, starting with an assessment of your options. 

1. Assess Your Options

The first step is to assess your options. If you want to stop using a 401(k), you could do nothing, cash out or perform the rollover: 

• Do nothing: When you quit or retire, if your plan allows for it, you could just let your savings be. However, you will likely lose access to internal 401(k) monitoring tools, which makes it harder to keep track of your savings. Some employers might charge higher fees to let ex-employees stay in their plans. 
• Cash out: Before cashing out, consider the impact this may have. You may have to pay a 10% early withdrawal charge, plus tax on the withdrawal. That could deplete your savings by nearly 40%.
• Rollover: You could roll it over to your new employer’s 401(k) plan or move it into an IRA. Because of the potential cost-effectiveness, better investment selection and greater control they offer over investments, it is advisable for most people to roll over 401(k) plans into Roth IRAs.  

2. Choose a Type of IRA

When you decide to roll over the IRA, you have two options to choose from:

• Traditional IRA: Choosing to roll over into a traditional IRA means you don’t have to worry about the tax consequences. The money transfers tax-free, and you pay taxes when you withdraw it later in retirement.
• Roth IRA rollover: You may need to pay tax immediately upon the rollover unless you’re transferring a Roth 401(k). However, if your income will be higher in retirement, a Roth IRA rollover might be the way to go. Lower Roth IRA investment fees and access to better-performing investments could also cushion the blow of paying extra taxes now.

3. Choose a Rollover Option

The actual rollover process offers you two options.

Direct Rollover

Also called a trustee-to-trustee rollover, a direct rollover is often the best way to do this. Your existing plan’s administrators will work with the trustees of the new plan to complete the transaction. Once the money rolls over, you get to work with the custodians of your Roth IRA account to make investment decisions.

Indirect Rollover

This involves withdrawing the money yourself and having your employer withhold 20% of your balance. You’ll have 60 days to figure out the process.  But considering it's more complicated, a direct rollover is a simpler solution for most people. You can also learn more about how to open an IRA. 

4. Make an Investment Decision

Once the funds are transferred to the Roth IRA account, they will be in the account as cash or cash equivalents. Now, it's time to invest in them. To start, check out Benzinga's retirement investing guides or the best investments for a Roth IRA. 

When building your portfolio, you'll need to consider your age, risk tolerance and the fees associated with the securities, funds or bonds you're interested in investing in. A risk-balanced, diversified portfolio to help mitigate risk, for example with a portion in low-cost index funds, can be a good option for many investors planning for retirement. 

Should You Convert Your 401(k) to a Roth IRA?

Converting a 401(k) from a previous employer makes sense for many financial reasons, from better investment options and control to tax-free growth. However, before moving ahead you need to make sure you're allowed to roll over your 401(k) funds directly to a Roth IRA. 

If you're still working for the company, you might not be allowed. Many companies only allow former employees to do rollovers or conversions.

However, some companies allow current employees to roll some of their savings over to a traditional IRA. In that case, you could roll over to a traditional IRA, and then open a Roth IRA and do the conversion.

You'll also want to consider how much you plan to convert. You can convert the full value of your plan or a portion if the plan allows it. This can be helpful if you have significant savings in the Roth IRA as a large conversion can put you into a higher tax bracket for the year. 

If you can't do a partial conversion, you can always roll part of your savings into a Roth IRA and the other part into a traditional IRA.

Consider converting a 401(k) to Roth IRA for:

• Greater flexibility and investment options
• Possible long-term tax savings
• Fewer limitations on withdrawal
• No minimum distributions so your funds can keep growing

Factors to Consider Before Transferring Your 401(k) to Roth IRA

The Financial Industry Regulatory Authority (FINRA) offers some great tips on what to look out for when making rollover decisions. Before you start making investment decisions, it’s important to choose the right firm. Consider:

• Fees: Check out what each prospective brokerage charges in fees, including annual fees, trading commissions, market data access fees, inactivity fees, account transfer fees and account closing fees. Also, make sure that you’re taking taxes into consideration. You’ll need to pay taxes on your rollover.
• Diversity of investments: Does the brokerage offer a wide range of investments, such as stocks, bonds, ETFs, low-cost mutual funds, options and foreign exchange trading?
• User-friendly platform: If this is your first foray into online investing, you need a brokerage that offers a super-easy platform to navigate and use. Also, look for plenty of videos and investor-education tools.
• Reporting and account management: Check out the type of reporting and account monitoring tools offered. It can be a good idea to open a practice account first before committing your Roth IRA savings to a specific brokerage account.
• Online/telephone/app help: Check out the brokerages’ helpline and customer support policies. You don’t want to choose a broker that only provides support on weekdays from 9 a.m. to 5 p.m. and is off on weekends.

You have many choices for investing funds in your Roth IRA account, ranging from professionally managed options to self-directed investments. Find some of the best IRA accounts here. 

How to Reduce Taxes When Converting a 401(k) to a Roth IRA

When you convert a 401(k) to a Roth IRA, you'll need to pay taxes on those funds at your current tax rate. How much that is depends on how much you convert and how much other taxable income you've earned for the year. 

If you made nondeductible 401(k) contributions in the past, you may not owe taxes on the full amount of your 401(k) to Roth IRA conversion. If you roll over a 401(k) to a traditional IRA, you won't have to pay taxes on the funds. 

Alternatives to Transferring a 401(K) to a Roth IRA

There are several alternatives to 401(k) to Roth IRA conversion. Here are other options to consider. 

• Leave funds in a former employer’s plan: This has limitations, as you might have to pay higher fees or may not retain access to the app or management software. Speak to your employer's HR department to see if this option will work.
• Roll over to a new 401(k): You could roll over your previous employer's 401(k) into your new employer's 401(k).
• Roll over to a traditional IRA: If you opt to roll over to a traditional IRA, you won't have to pay taxes or penalties. You should have greater flexibility for investment options and still have the option to roll over the traditional IRA to a Roth IRA. 
• Take a cash distribution: While you can take a cash distribution, you'll have to pay a 10% early withdrawal penalty if you are under 59 ½ plus all taxes at your current income tax rate. It could drive you into a higher tax bracket by substantially increasing your income for the year. 

Should You Convert 401(k) to a Roth IRA?

For many people, a 401(k) to Roth IRA conversion can give you greater control of your investments. You gain the flexibility to choose low-fee investment options and aren't required to take minimum distributions so your investments can continue to grow. 

If you're committed to saving more for retirement, a Roth IRA conversion can be a good move, especially if you want to plan for higher income as you retire. If you're getting started, you can find some of the best IRA accounts and learn how much to put in a Roth IRA each month. You can also compare Roth IRAs vs. high-yield savings accounts and learn how you can use both to reach your savings goals.  

Frequently Asked Questions