How to Rollover a 401k to an IRA

Leaving your corporate gig can be a good or bad thing depending on your particular situation.

One thing though that’s usually a positive when this happens is that you get to move your 401K funds into an IRA.

The 401K rollover to IRA, sometimes called a 401k IRA rollover or 401K to Rollover IRA is a common move people make when they leave their job.

If you’ve been fired or you quit your job, you have the option to roll your 401K funds over into what’s known as a Rollover IRA.

You can also keep the funds in the 401K. You just won’t be able to contribute new money to it, losing the benefit of the 401K match. Another option is to cash out your funds. Of course, you’ll have to pay the taxes and penalties for such a move. For most people this is a bad idea.

What is a good move though is to move your 401K funds to a Rollover IRA. Here’s why…

Why You Should Consider a 401K Rollover to an IRA

• More Options – Your 401K plan might be limited in the amount of investment options you have. In fact, most are. A Rollover IRA can usually provide you with many more investment options. Soon I’ll write about the self-directed IRA and how a rollover to that type of IRA can give you even more investment options.
• Potentially Lower Fees – 401K plans usually force you to invest in a limited number of high-cost funds. 401k fees and expenses stink. In an IRA, which you can open at any discount online broker or any large investment firm, can be set up to include only low-fee funds.
• Consolidation – Another advantage to the 401K Rollover to IRA is the consolidation of accounts. Having all your retirement investments under one roof makes things easier for some people.

The 401K Rollover to IRA Rules

The tax rules around 401K rollovers are pretty simple. The 401K and IRA are treated the same from a tax perspective. Therefore, when you move your money from one to the other you don’t need to pay any taxes.

Making the 401K Rollover to an IRA

Ask Your Old Employer About Withdrawal Fees or Filing Requirements – Give your employer’s plan a call and find out how to get your money out of there. Ask about any fees you might incur, the forms you’ll need to complete to make the roll over, and if there is anything you need for when you file your taxes. If there are some hefty fees you may need to reconsider your move.

Open up a Rollover IRA – Decide which is best for you: a discount broker for active traders like Ally Invest and eTrade, or a big investment firm (or mutual fund company) like Vanguard. Then go open up an account there. Tell them you are planning on funding the new account with a rollover.

Submit the Forms to the Old Employer and Monitor the Rollover – Now that you have your new account ready and you know all the rules to make the move, it’s time to initiate the rollover. Turn in your forms to the old employer and they will send you or your new account holder the money to fund the IRA. FYI – I recently did a 401K rollover and was able to complete the rollover request over the phone.

Can You Do a Partial 401K Rollover to IRA?

Yes, you can leave some money in the old 401K and move a portion to the new Rollover IRA.

Have you completed a rollover recently? Share your story in the comments below…