Banking » Savings » How To Roll Over Your 401(k) To An IRA
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How To Roll Over Your 401(k) To An IRA

Rolling over your 401(k) to an IRA involves several key steps to ensure a smooth transfer. Here's how to make it and when it's a good idea
Author: Baruch Mann (Silvermann)
Baruch Mann (Silvermann)

Writer, Contributor

Experience

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
Interest Rates Last Update: April 15, 2024
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Author: Baruch Mann (Silvermann)
Baruch Mann (Silvermann)

Writer, Contributor

Experience

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
Interest Rates Last Update: April 15, 2024

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Table Of Content

In this guide, we will walk you through the various steps involved in rolling over your 401(k) into an Individual Retirement Account (IRA).

We'll delve into the advantages of making this move, explore the entire process, highlight the benefits, and address potential pitfalls. 

5 Steps To Roll Over Your 401(k) To An IRA

Rolling over your 401(k) to an IRA involves several key steps to ensure a smooth and efficient transfer. Here's a step-by-step guide to help you navigate the process:

Start with taking a close look at your existing 401(k) plan to understand its terms, investment options, fees, and any employer contributions. Assess whether rolling over is the right decision based on your individual financial goals and circumstances.

If you've decided to continue, now it's time to select the type of IRA that best suits your needs – a Traditional IRA or a Roth IRA. The main difference lies in when you pay taxes on your contributions and withdrawals.

You may want to consult a financial advisor to determine which option aligns better with your retirement strategy.

If you don't have an IRA already, open an account with a reputable financial institution or brokerage firm. There are many different IRA providers available, so you should shop around and compare different rates and terms.

Some factors to consider when choosing an IRA provider include:

  • Interest rates: Some IRA providers offer higher interest rates than others.
  • Fees: Some IRA providers charge fees for things like account maintenance and trading.
  • Investment options: Some IRA providers offer a wider variety of investment options than others.
  • Customer service: Some IRA providers have better customer service than others.

You will need to contact your 401(k) provider to initiate the rollover. They will provide you with a form to fill out and send to the IRA provider you have chosen.

The form will ask for information about your 401(k) account, such as the account number, the name of the plan administrator, and the amount you want to roll over.

Once you have received the form from your 401(k) provider, you will need to complete it and send it back to them. 

Check the status of your rollover to make sure it was processed successfully.

You can perform a direct rollover, where the funds move directly from your 401(k) to your IRA, or an indirect rollover, where you receive the funds and then have 60 days to deposit them into the IRA.

Keep in mind that with the indirect rollover, you may be subject to taxes and penalties if not completed within the time limit.

Once the funds are successfully transferred to your IRA, review and adjust your investment strategy according to your risk tolerance and retirement goals.

Take advantage of the wide range of investment options available within an IRA. These options may include stocks, mutual funds, exchange-traded funds (ETFs), bonds, real estate investment trusts (REITs), and more.

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Tips For A Successful Rolling Over

Here are some essential tips to consider when rolling over your 401(k) to an IRA:

  • Understand Your Options: Familiarize yourself with the different types of IRAs available (Traditional IRA and Roth IRA) and determine which one aligns best with your retirement goals and tax situation.

  • Compare different IRA providers. There are many different IRA providers available, so you should shop around and compare different plans. Some IRA providers offer higher interest rates or lower fees than others.

  • Consider your tax situation. When you roll over your 401(k) to an IRA, you will not have to pay taxes on the money. However, if you are younger than 59½, you may have to pay a 10% early withdrawal penalty if you withdraw the money from your IRA within 5 years of the rollover.

  • Consider working with a financial advisor: Seeking advice from a financial advisor can be beneficial, especially if you are uncertain about the rollover process or need assistance with investment decisions.

  • Avoid Indirect Rollovers If Possible: If you decide on a rollover, opt for a direct rollover where the funds move directly from your 401(k) to your IRA. This eliminates the risk of penalties and taxes associated with an indirect rollover if not completed within the 60-day window.

  • Be Cautious with Cash: If you decide to take the funds from your 401(k) as cash during an indirect rollover, be prepared to pay income taxes and, potentially, early withdrawal penalties if you're under 59 ½.

  • Maintain Asset Allocation: When transferring your investments to the IRA, try to maintain a similar asset allocation to what you had in your 401(k). This preserves your investment strategy and risk profile.

  • Review Investment Options: Take advantage of the broader investment options available in an IRA. Diversify your portfolio to spread risk and capitalize on various investment opportunities.

  • Keep Beneficiaries Updated: Ensure that your IRA beneficiary designation is up to date and aligns with your current wishes to avoid any complications later.

  • Consolidate Retirement Accounts: If you have multiple 401(k)s from previous employers, consider consolidating them into a single IRA. This can make managing your retirement savings more convenient.

  • Stay Informed: Keep yourself updated on retirement and tax laws that might impact your IRA. Understanding the rules helps you make informed decisions about your investments.

  • Regularly Review Your Portfolio: Periodically reassess your investment portfolio to ensure it remains aligned with your long-term goals. Make adjustments as needed to accommodate changes in your financial situation or risk tolerance.

Remember that a 401(k) rollover is a significant financial decision that can impact your retirement savings and tax situation. By following these tips and seeking professional advice when necessary, you can make the most of your IRA rollover and work towards a secure and fulfilling retirement.

How To Roll Over Your 401(k) To An IRA
There are many different IRA providers available, so shop around and compare plans (Photo by fizkes/Shutterstock)

When To Roll Over Your 401(k) to an IRA?

Here are some of the times when you might want to consider rolling over your 401(k) to an IRA:

  • When you leave your job. If you leave your job, you will have the option to roll over your 401(k) to an IRA. This is a good time to do it because you will not have to pay taxes on the money.
  • When you change jobs. If you change jobs and your new employer does not offer a 401(k) plan, you may want to roll over your 401(k) from your old employer to an IRA. 
  • When you want to take advantage of lower fees. If you find an IRA provider that offers lower fees than your 401(k) plan, you may want to roll over your 401(k) to an IRA. This can save you money over time.
  • When you want more investment options. If your 401(k) plan does not offer the investment options that you want, you may want to roll over your 401(k) to an IRA. This will give you access to a wider variety of investment options.

Ultimately, the decision of when to roll over your 401(k) to an IRA is a personal one. You should weigh the pros and cons of each option and decide what is best for you.

Roll Over Your 401(k) To An IRA: Pros And Cons

Rolling over your 401(k) to an IRA comes with its own set of pros and cons. Understanding these can help you make an informed decision based on your specific financial situation and retirement goals.

Benefits
Drawbacks
More Investment Options
Less Flexibility
Control
Loss of Company-Specific Benefits
Consolidation and Simplification
Losing Creditor Protection
Lower Fees
Complexity Of Investing

IRAs generally offer a broader range of investment options compared to most 401(k) plans. 

With an IRA, you can choose from a variety of stocks, bonds, mutual funds, ETFs, and other investment vehicles, allowing for better customization of your portfolio.

Rolling over to an IRA provides more control over your retirement savings. 

You can actively manage your investments, adjust asset allocation, and change investment strategies according to your preferences and changing market conditions.

If you have multiple 401(k) accounts from previous employers, consolidating them into a single IRA can simplify your financial life. 

It's easier to track and manage a single retirement account rather than juggling multiple accounts.

IRAs typically have lower fees than 401(k) plans. This can save you money over time.

401(k) plans typically offer more flexibility than IRAs. For example, some 401(k) plans allow you to borrow money from your account, while IRAs do not.

Some 401(k) plans offer unique features or investment options that may not be available in an IRA. 

Additionally, some employers might provide matching contributions, which can be a valuable benefit.

In some states, 401(k) plans offer better creditor protection than IRAs. 

If creditor protection is a significant concern for you, consult with a financial advisor to understand the specific laws in your state.

Managing your own investments in an IRA requires a level of financial knowledge and discipline. 

If you're not comfortable making investment decisions or prefer a hands-off approach, a 401(k) managed by your employer might be a simpler option.

FAQs

Some financial institutions may charge fees for account setup, maintenance, or specific transactions. Compare different providers to find one with reasonable fees.

Yes, you can split your 401(k) rollover into multiple IRAs as long as the total amount doesn't exceed the rollover amount from your 401(k).

If you have an outstanding 401(k) loan, you may need to repay it before proceeding with the rollover to avoid tax consequences.

The investment options available in an IRA will vary depending on the IRA provider you choose.

There are no income limits for rolling over a 401(k) to a Roth IRA, but income limits apply for direct contributions to a Roth IRA.

The rollover process typically takes a few weeks to complete.

In some cases, you may be able to undo a rollover within a certain time frame. This is known as a “rollover reversal” or “recharacterization.” Check with your IRA provider for their specific policies.

Yes, you can still roll over your 401(k) to an IRA after reaching age 72 and taking required minimum distributions (RMDs).

A 60-day rollover is when you take the money from your 401(k) account and roll it over into an IRA within 60 days.

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Picture of Baruch Mann (Silvermann)

Baruch Mann (Silvermann)

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
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