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How to Roll a 401(k) Into an IRA

Learn the benefits of rolling over a 401(k) plan into an IRA to manage your retirement savings, including the different ways and steps to transfer those assets.

When you leave your job, you may wonder what you should do with your old 401(k).

Usually, you can keep the account open, but you might have to pay fees, and if you move jobs frequently, keeping track of multiple 401(k)s can get difficult.

When you leave a job that offers a 401(k), you have the option of rolling your 401(k) into an IRA. There are lots of reasons that this may be a good idea.

Here’s how to get through the process.

How to Roll a 401(k) into an IRA

There are two types of rollovers you can use when moving money from a 401(k) to an IRA:

  • Direct rollover
  • Indirect rollover

Direct rollover

A direct rollover is the best way to move money from a 401(k) to an IRA.

During a direct rollover, the brokerage managing your 401(k) sends your money directly to the broker that will manage the IRA.

Here are the steps for a direct rollover.

1. Open an IRA at a brokerage first

Start by opening an IRA at the brokerage that you want to work with. You can choose the brokerage based on many factors, such as the fees they charge or the mutual funds they offer.

2. Initiate rollover through brokerages

Let your new brokerage know that you want to roll your 401(k) into the new account.

Your brokerage should be eager to help as they want to make it easy for you to move your assets. The broker will let you know what information they need.

Typically, you’ll need to provide the following info:

  • Name of the 401(k) administrator and brokerage
  • Account numbers at both providers
  • Whether you want to transfer the assets in-kind, or as cash
  • The amount you’re rolling from the 401(k) to the IRA
  • You’ll also have to fill out the paperwork both institutions direct you to submit. This may involve getting documents notarized or a medallion signature guarantee, so be ready for a bit of inconvenience during this process

3. Confirm rollover with 401(k) administrator

You’ll probably have to reach out to your 401(k) provider to let it know that you’re going to roll your money into an IRA.

Ideally, you’ll only have to confirm the rollover, leaving the heavy lifting to your new brokerage.

4. Wait for rollover to complete

It will take some time for the 401(k) administrator to move the money to your brokerage (and into the IRA).

Typically, the process takes 60 to 90 days.

Indirect rollover

In some cases, your 401(k) provider or new IRA provider will make you do an indirect rollover.

This is a more difficult process.

More crucially:

There’s also a bit of risk involved.

During an indirect rollover, your 401(k) provider will disburse your 401(k) balance to you. If you don’t get the money into your IRA within sixty days, the IRS will treat this as a distribution.

You’ll owe taxes on the amount disbursed, plus a 10% penalty if you’re under the age of 59½.

Here are the steps to do an indirect rollover.

1. Open an IRA with a brokerage

You'll need to have an IRA ready to receive the funds from the 401(k) transfer.

2. Contact your 401(k) provider and initiate the rollover process.

With an indirect rollover, this means selling your investments and having your 401(k) provider mail you a check or transfer the funds electronically.

You may get some hassle during this process as your 401(k) provider has an incentive to convince you to leave your money where it is.

Make sure to ask your 401(k) provider not to withhold taxes. As long as you put the money in your IRA within the time limit, you’ll owe no taxes related to the rollover.

3. Wait for the money to arrive

If you’re expecting a check, keep an eye on your mail. If your 401(k) provider is transferring the fund electronically, check your accounts regularly.

4. Deposit the funds into your IRA quickly

As soon as you receive the money, send it to your IRA provider/brokerage.

Remember, if more than 60 days pass from the time the money leaves your 401(k) to the time it arrives in your IRA, the IRS will treat it as a distribution and charge taxes.

Why Roll Over Your Old 401(k) to an IRA

The biggest advantage of 401(k)s and IRAs is the tax benefit when you contribute to retirement saving.

Pretty much anyone can open an IRA, but 401(k)s are only offered through employers.

Despite this difference, they work very similarly in terms of their tax benefits and the restrictions they place on the money you deposit.

Investment options

One of the biggest benefits of an IRA compared to a 401(k) is flexibility.

With a 401(k), you’re usually restricted to investing in the mutual funds offered by your employer.

With an IRA, you get to choose how to invest. You can invest in mutual funds of your choice or even invest in individual stocks and bonds.

Some employers offer 401(k)s with expensive mutual funds with poor performance.

If you roll your 401(k) balance into an IRA, you can move your money into lower-cost mutual funds or other types of investments.

Simplify your accounts

Another benefit of rolling a 401(k) into an IRA is that it makes it easier to keep track of your money.

If you have five 401(k)s, it can be hard to know where all your money is.

If you combine all of those accounts into a single IRA, it can make your life much easier.

Tips and Things to Watch Out For

Rolling money from a 401(k) into an IRA isn’t an incredibly complicated process, but there are a few tips and tricks to keep in mind.

In-kind transfer

If you’re happy with the funds your money is invested in and you’re doing a direct rollover, you can ask your 401(k) provider to do an in-kind transfer.

During an in-kind transfer, your 401(k) provider will send the money to your new IRA without selling your mutual fund shares for cash first.

That saves you from selling your shares, transfer the balance as cash, then buy the mutual fund again.

It also saves you from missing out on potential gains while your account balance sits in cash.

New investor bonuses

Another thing to consider is that many brokerages will offer incentives for people who open new accounts with large balances.

For example, you might get a bonus of a few hundred dollars when you open a new account.

If you like a few brokerages equally, these bonuses can be a good way to make your decision as the bonus is essentially free money.

Rollover quickly

The biggest pitfall when rolling money from a 401(k) to an IRA is taking too long to do an indirect rollover.

The last thing you want is to get hit with penalties and taxes by failing to move money into your IRA quickly enough.

Once you start the rollover process, pay close attention to it until your money arrives in the IRA.

FAQs

Do you have to sell investments when rolling from a 401(k) to an IRA?

No, if you perform an in-kind transfer, you can move money from your 401(k) to an IRA without selling your investments.

This isn’t possible with all brokerages, but if you can do it, it is one of the smoothest ways to complete a rollover.

Is there a fee for rolling your 401(k) into an IRA?

There are almost no companies that will charge you if you want to transfer money into one of their accounts, but your 401(k) provider might charge you a fee for moving money out of your account.

If your 401(k) does try to charge a fee, ask your new IRA provider if it can cover the fee, many will be willing to do so if you ask.

How long does it take to complete a rollover from a 401(k) to an IRA?

The length of the process depends greatly on the two companies involved.

In general, direct rollovers take less time than indirect rollovers because the money moves directly between the brokerage accounts.

Expect the process to take at least two weeks to complete but in some cases, it can take closer to a month.

Conclusion

401(k)s and IRAs are two different types of retirement accounts.

There are many great reasons to move money from your 401(k) to your IRA.

While it might seem stressful, rolling money from a 401(k) to an IRA is relatively simple as long as you know how the process works.