What You Need to Know About a 401k Rollover to IRA Account

401k rollover to iraIf you’ve changed jobs and still have a 401k balance with that former employer, you should know that you have options for what you can do with your money.  One of the best choices you can exercise is to make a 401k rollover to IRA account where your money can continue to grow tax free just as it did inside the old 401k account.

When you consider an IRA vs 401k, there can be a lot of advantages to switching your money from one to the other.  Here are a few things you need to know about making the rollover.


Making a 401k Rollover to IRA:

Here are the basic steps to getting your rollover started:

  1. Open an IRA.  If you’ve already got an existing IRA with a financial institution, then this step is already complete.  If you don’t, chose from any of the discount brokers that are out there such as Vanguard, Fidelity, etc.  Be sure to choose someone with a great reputation, good choices, and low expense fees.  Once you have a broker selected, you should speak to a representative at the company and inquire if there are any fees associated with making the rollover and whether your account should be a Traditional or Roth IRA.
  2. Move Your Money.  Contact your old plan provider and let them know of your intentions to make the switch.  Ask for a direct transfer to the new fund (if available).  If they insist on giving you a check, make sure it is made out to the new financial institution that is hosting your IRA.  Also make sure that you complete the rollover by depositing the money within 60 days of when it is released.  Both of these actions will keep you from paying unnecessary taxes and penalties.
  3. Invest.  Once the 401k rollover to IRA is complete, invest the money with confidence.  Choose low expense funds that have proven to deliver stable returns over the long run.  Also be sure to choose a mix of funds that is diverse among different types of investments like stocks, bonds, cash, real estate, etc (this is called asset allocation).


The Benefits of a Rollover to an IRA:

There are a lot of great things about rolling over your money from a 401k plan to an IRA:

  • Better options.  Usually employer 401k plans have a very limited amount of investment choices.  Usually there are only a handful of mutual funds investing in very specific asset classes.  When you make the switch to an IRA, you open your choices up to any of the investment options that the financial institution offers.  You could still choose mutual funds, or you could invest in stocks, ETF’s, REIT’s, etc.
  • Lower expenses.  401k plans are also notorious for having higher fees and maintenance expenses than IRA’s.   For example, some 401k plans have expenses that are anywhere from 0.5% to 2.0%.  In contrast, if you have an IRA with the Vanguard 500 Index Fund Admiral Shares (VFIAX) which trails the S&P 500 stock market index, you would pay an expense ratio of 0.05%!  That’s $5 for every $10,000 you have invested.


Other Options:

Although a rollover to IRA is a good choice, it may not be your best or only choice in certain situations.  Here are a few more alternatives to a rollover you can consider:

  • 401k to 401k rollover.  If you know for a fact that your new 401k will have better investment choices and fees than the old one, then you may wish to simply move the money over from the old 401k to a new one.
  • Keep the money in the old 401k.  If your old plan has low fees and great investment options, then there may be no harm in leaving your money right where it is.
  • Cash out.   Probably the most costly option because of all the fees and taxes that would need to be paid.  Only use this option if you need the money immediately and have no other choices.


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