How to Rollover Your 401k to an IRA

Posted by Madison on September 4, 2013

These days switching companies, and even industries, a number of times throughout one’s career is the norm. In the process, your retirement funds may turn into a jumble of old 401k’s that you haven’t gotten around to organizing.

What to Do With Old 401k Plans

After leaving an old job, you can:

  • Leave your 401k with the old plan provider if they allow it.
  • Take a distribution in cash (please don’t do this!)
  • Rollover your 401k to an IRA.
  • Rollover your 401k to your new employer’s plan.

Roll Over Your 401k to an IRA

Making a rollover to an IRA can be the right decision if you will have a better selection of funds and lower fees than the options in the 401k.

Rolling over your 401k into an IRA can simplify your finances and help you gain better control over your investments and it may not be as much of a hassle as you think.

Here is how to handle your 401k rollover to an IRA. We’ll also talk about rolling over your 401k to a new employer’s plan in a future article.

401k Rollover to IRA Options

There are two ways to complete a rollover from your 401k to your IRA, including a rollover of a distribution and a direct rollover.

Rollover your distribution check. If you receive a distribution from your 401k you have 60 days to complete a traditional rollover of those funds into your IRA. Your 401k plan administrator will usually withhold 20 percent of the amount of your distribution for income tax purposes.

Make a direct rollover. You may request your 401k plan administrator to roll your distribution directly into your IRA. In this situation the plan administrator is not required to withhold taxes from the distribution, since you never actually take possession of the funds.

How to Roll Over Your 401k to an IRA

  1. Open an IRA. If you don’t have an IRA, you’ll need open an account to receive the rollover funds. Many of the online discount brokers offer no fee IRAs. You can also pick up a sign up bonus while rolling over your IRA. For example, ETrade currently offers a $200-$600 rollover bonus.
  2. Contact your 401k Provider. Your HR Department should be able to help you contact your 401k provider. When you call the provider, tell them you’ve left your job (they should have a record of this) and want to move your funds to an IRA. They will point you to the forms you need for your rollover (also available online) and initiate the process of disbursing your funds.
  3. The Funds. In 1-2 weeks, the brokerage will either send you or the new brokerage a check made out to “Brokerage FBO Your Name.” If they send it to you, immediately forward it to the brokerage with your completed forms. If they send it straight to the brokerage, you’ll only need to submit your forms.
  4. Follow Up! After another week, you should call the new provider to ensure they’ve received your info and find out any how to access your account.

Tax Withholding on the Rollover

You will need to rollover the entire distribution to avoid income taxes on the distribution. This means if your 401k plan administrator withheld 20 percent of your distribution for taxes, you will have to come up with an equal amount to contribute to your IRA or that amount will be subject to early distribution tax penalties.

Other Things to Consider

Be Patient. Make sure you wait until the contribution from your last paycheck at your old employer settles (about a week).

Roth or Traditional? After evaluating your tax situation, you’ll want to decide whether to move your funds to a Roth or Traditional IRA, which will determine which form you need.

Existing Brokerage. If your 401k and IRA are with the same brokerage, the rollover 401k to IRA process may be even easier. You’ll likely only have to submit the proper forms. The brokerage should be able to transfer funds into your IRA (new or existing) without cutting a check.

Fund Minimums. Some brokerages have fund minimums. This can work to your advantage if you have enough in a 401k to get into a fund you wouldn’t otherwise have access to. However, if your balance is small, you may have to start in a smaller fund.

Market Prices. You can’t control what date (and therefore, prices) your investments are sold/purchased on and your money will be out of the market during the rollover. It’s not a big deal, but just something to keep in mind during your transfer.

More on 401ks and IRAs

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Comments to How to Rollover Your 401k to an IRA

  1. It should be stressed that rolling a traditional 401k into a Traditional IRA prevents you from doing a backdoor Roth contribution without paying tax on pre-tax money in your IRAs which also get converted in the proportion of pre-tax/post-tax money in all your IRAs combined.

    Thus, if possible rolling over previous 401k to your next employers 401k would be nicer, provided you have good options in the new 401k.

    Although not advocated, there can be cases when you have to take loans from your retirement accounts. Loans from IRAs are not allowed but many 401k plans do allow loans if not most.

    Nitin Deshmukh

    • Actually there are IRA products which can allow loans. So that is not a big deal.

      Nitin Deshmukh

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