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How to Rollover 401(k) to IRA

How to Rollover 401(k) to IRA

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When you leave your job, you have four options for the money in your 401(k) plan. You can cash out the money, keep it in your current plan, or move it to another qualified retirement account (i.e., your new employer’s 401(k) plan, a Traditional IRA, or a Roth IRA). The action of moving money out of your current 401(k) plan to a new qualified account is called a rollover.

How to Rollover 401(k) to IRA 1

Table of Content

Who is Eligible for a Rollover

You are eligible for a rollover when you leave your job — voluntarily or involuntarily. Some plans also offer what is called an “In Service 401(k) Distribution,” which allows you to rollover your 401(k) fund even while you are still working.

Your 401(k) Rollover Options

According to the GAO, separating 401(k) plan participants generally have up to four options for their savings.

How to Rollover 401(k) to IRA 2
Before going through with a rollover, you should consider your options carefully.

1. Cash Out Your 401(k): A BAD idea

Don’t do it. This is the worst thing you could do with your 401(k). When you cash out your 401(k), you are taxed on the withdrawal and potentially penalized.

Any amount withdrawn is subjected to Federal, and possibly State and Local, taxes. The increased income could also push you into a higher tax bracket. Also, you may be subject to a 10% early withdrawal penalty if you are younger than 59 1/2. Assuming an effective combined federal and state tax rate of 35%, a $100,000 cash out could cost you $45,000 in taxes and penalties, leaving you with only $55,000.

2. Keep Money in Your Current Plan

Typically, you only want to do this if your current plan offers great investments at low costs. Check with the current plan administrator to see if this is an available option for your plan. If it is, ask if there are extra fees for keeping your money in the current plan and if you can roll the plan over down the road if you change your mind. If everything checks out, work with your current

3. Rollover to Your New 401(k) Plan

If you have access to your new employer’s plan, then this might be a good option for you if the fees and investment choices are good. To rollover into your new plan, work with the new plan administrator to coordinate the process. This assumes that your new employer and plan administrator allows this.

4. Rollover to an IRA: the BEST option

Compared to the options above, a rollover to an IRA is usually the best option. You can generally lower your investment expenses and gain access to a much wider variety of investment options. You can even switch among the many different brokerage firms to take advantage of different investment options, tools, features, prices, fees, and other benefits.

Personally, I use Ally Invest (formerly TradeKing) and TD Ameritrade. Both of them had a representative that helped me rollover my 401(k) into my IRA account. As of this writing, I have already done five rollovers (all into an IRA).

Also, you have the option of converting your 401(k) to a Roth IRA, which allows your retirement savings to grow tax-free.

Tax Implications

We already discussed what happens if you cash out your 401(k) — not good!

For the other three options, there is no tax liability as long as you do it right. When you move your money, make sure you use a trustee-to-trustee transfer  (also called a direct transfer, see below).

A rollover from a Traditional 401(k) to a Roth IRA does trigger a taxable event, however. It will increase your taxable income, and potentially bump up your marginal tax rate into the next tax bracket.

  • If you anticipate high taxable income this year, it might be worthwhile to hold off on the rollover to a Roth IRA. You can keep your money in your current employer’s plan and rollover at a later date, or rollover to a traditional IRA, and then convert it to a Roth IRA later.
  • Rollover into a Roth IRA does not increase your Modified Adjusted Gross Income, so your ability to contribute to an IRA should not be impacted by the rollover.

Since I am not a tax advisor, I recommend that you consult with a professional tax advisor before doing a rollover to a Roth IRA.

How to Rollover Your 401(k) to an IRA

Now that you’ve decided on the 401(k) rollover to IRA option, here is what you need to do:

  1. Open an Individual Retirement Account (IRA) with any financial institution that offers an IRA. An excellent choice is at one of the many discount brokers on this list. In general, you want to pick the company that provides the type of investments you want with low trade commissions and fees.
  2. Inform your plan administrator that you want to rollover to an IRA. Make sure your plan administrator makes the check payable to the investment company that you choose. This is called a trustee-to-trustee transfer, and it helps you avoid the automatic 20% tax withholding (see below).
  3. Invest Your Money. Once the transfer is complete, your money will sit in an interest-bearing investment account, such as a money market account, with a very low yield. You will have to invest your money according to your asset allocation plan — the specific investment options you have depend on your broker. In general, you want to invest in a well-diversified portfolio of low cost and passively managed mutual funds (try Index Funds) and ETFs.

Trustee-to-Trustee Transfer (Direct Transfer)

A trustee-to-trustee transfer is an instruction to your plan administrator to send money directly to your new 401(k) plan, or your IRA custodian. If you fail to specify this action, and an indirect transfer occurs, i.e., the check is made out to you instead, several things happen:

  • Your current plan will automatically withhold 20% of the fund. Assuming it’s a $100,000 transfer, you will receive an $80,000 check.
  • You will have to come up with an additional $20,000 and deposit the full $100,000 into the new 401(k) plan or IRA account within 60 days. If you only deposit $80,000, the remaining $20,000 will be treated as a withdrawal (and subject to taxes and penalties as explained in Cash Out option above). If you fail to deposit any of the money within 60 days, the entire amount is considered withdrawn.

Bottom Line

If you are facing this decision, consider performing a 401(k) rollover to IRA to take advantage of the opportunity to lower your costs and gain greater flexibility. Remember to research the investment company thoroughly before you open an IRA with them, and do your due diligence when selecting your investments. If you are uncertain, it’s usually a good idea to consult a professional to help guide you through this process and answer your questions.

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dave
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dave

IMO, converting to a Roth IRA may be a better option.

TLD
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TLD

I was laid off a few years ago. I had a job inther interim and now have been employed almost a year at my current place with a good future ahead of me. I now have 3 401K plans. I have left the prior 2 where they were since I was unsure of my future and they seemed safe for the moment. I am not paying any fees that I know of for any of them. Should I leave things as is? I do not wnat to rollover into the current 401k just in case. Can I move them into… Read more »

Reggie
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Reggie

I’m fully vested with the company I’m leaving. If I go with the lump sum distribution I will lose close to $3,000 in federal and state plus another $1,000 come 2011 return. Also I still owe on a loan under $1,000 in which I will be penalized 20% on the offset and another 10% come 2011 return. Choosing the rollover IRA let’s say 20-80 withdrawal of funds, all these charges will remain except the 20% on the loan. Okay my thing is I have a small business(registered clothing line) in which the money will be used for. Is there a… Read more »

Arch
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Arch

Can you have a roth IRA & 401 K simultaneously? I have my funds from my Ex job that I plan to roll over to roth IRA.
Can i Still continue to have my 401K at the current Job? Can I invest in both every year?

Should i consider rolling over to roth IRA in this case?

Stan
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Stan

I have $6,000 in a 401K from a previous employee and would like to set up an IRA. I have no clue on what company I should have set up a account with and if i should just do a rollover IRA or a ROTH. I plan to keep this account for the long term commitment. I’m not looking to be to risky but would like to invest. Low fees are a plus! Please help!!!!!

Alex
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Alex

Great article! Too many people leave money in the company 401k after they switch jobs, and neglect to convert to an IRA or Roth. Once you are established at a new job, that needs to be one of the first things you do.

As far as the IRA vs Roth, I prefer the roth as I want to minimize my tax burden after retirement. Sonce I have been putting away maximum contributions most of my adult life, I will likely retire in a higher tax bracket than I am in now.

Anyway, keep up the great articles!

Joe
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Joe

Pinyo, I got laid off last year and still have a 401k sitting there, I will be 54 this year and wanted to move the money to an IRA at my local credit union. My question is I am not earning as much as I did and(about $10 less an hour) so this are really tough, I get one more month of severence pay and then that stops. I would like to use about $7000 out of the 401K to pay off my car loan to save the payment of 373. a month. I know I need to pay @5000-6000… Read more »

Mominwantagh
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Mominwantagh

When you roll-over a 401(k) to an IRA or Roth-IRA what exactly happens? I have three 401(k)s from past companies in their stocks which are way down. So let’s say I have 100 shares of stock bought at $100/share ($10,000). Now the stock is only worth $50/share ($5,000 if I sold). When I roll over (assuming I put it back in the same stock) will I now only have 50 shares as opposed to my original 100?

Scott in Missouri
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Scott in Missouri

I am a 40 year old male leaving a job of 15 years to go to a job that will increase my salary about 20%. I have (2) 401k’s at my old job that have a total of $47k in them. Am I better off rolling them into an IRA or a Roth IRA? Why? Also I thought there was a maximum annual donation to a Roth, so if I go the Roth route, am I investing in multiple Roth’s due to the maximum annual donation? One last thing–is it possible to take the money from these 2 existing 401k’s… Read more »

MH
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MH

Hi, I have a 403b plan with my current employer and switching to a 1099 JOb and will be making 200k. I want to roll over to an IRA that allows me to buy stocks. I understand I don’t qualify for a Roth IRA is that correct? Once the IRA is set up is there a maximum limit of money I can put in the account and is it before tax or after tax? Once I’m eligible to take the money out I would be taxed like a 401k/403b? What is the story with SEP plan is that something I… Read more »

Linda Roberts
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Linda Roberts

My company is converting to a new 401K provider. They are going to take all the money in the old one and convert to new options in the new one. Given that I will probably leave soon anyway, I was hoping to avoid this step. Can I convert the money to an IRA while I still work there – and before they take it for the new plan?

HSS
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HSS

Hi, I contributed about 20K to my employer’s 401K plan… then my company got bought out and the newer company offered us another 401K plan and I started contributing to that…

I also hold a Roth IRA plan…is it possible to consolidate all of them into the existing roth 401K plan…

I plan to leave this employer soon so I’d want my money safe into an Roth IRA plan…

Is this possible?

Liliane Min
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Liliane Min

I have a question of how long it should typicaly take to rollover a 401 K to an IRA account (such as a vanguard). I recently started a new job and I contacted the account manager of my previous employer 401 K plans about my desire for the rollover. He tried to dissuade me from that, as he earns a commission. I told him I was sure I wanted to do that and after some hee-hawing, he agreed to start the process and told me it would involve a lot of paperwork. I have waited two weeks and I haven’t… Read more »

Danny
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Danny

Hi, great article!

I have about 20k in my former employer’s 401k (managed through Schwab). My new employer does not offer a great 401k plan. I am 25 years old. Still unclear whether I should rollover my old 401k into a Roth IRA or Traditional IRA. I already have a traditional IRA account (ING) with just $1k that I set up a couple years ago.

Any advice would be greatly appreciated! Thanks.

thomas
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thomas

I have an ira account with a broker. Can I take some of that money out to set up another ira account somewhere else

Sid
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Sid

Hi, I was working in the US until 2009 and now work for the same company but in a different country. My current balance in my 401(k) plan is about 18000. I was told by the plan admin that I had to keep the 401(k) as-is until I left this company. If I leave this company in 2012 outside US, what will be my best option – cash out? I will have zero income from other sources in 2011 and 2012 in the US. If I have aspirations to buy a low-cost home in the US, in that case, what… Read more »

Kelly
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Kelly

Hi, I have the choice to roll over my previous 401K into a Roth IRA or Traditional IRA. I still am confused as to which would be a better choice. I only have 2000 in my previous 401K. My new employer will began a new 401K after 1 year of employment. Can you give me advice as to which is best with this amount of money? Also, to my understanding, my 401K was invested into several funds. When this is rolled over to a Roth IRA or IRA, does it continue investing in the same funds or do I need… Read more »

mike
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mike

my position at work after being there 16 years was eliminated (given to a family member of the company) because of my salary there i was only able to contribute the minimum, but because of my age (55) i was able the last several years to make the 5,ooo $ catch up. the company never had a contribution to the plan.. i have about $ 40,ooo in there and have been off work since december. i am not real savy as to picking funds etc, we had someone at work that kinda did that for the rest of us.. of… Read more »

Donna
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Donna

Hello! My husband has two 401k plans from his previous employers. We are planning to rollover them to a traditional IRA. Do you think it is a good idea to rollover them to our credit union’s IRA? According to our credit union’s website, their dividend rate for IRA is 2.07% and the APY is 2.09%. Do you think this is good?

Thanks.

jun
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jun

My company was just bought out and the 401k will be terminated. I will have to look for a new job in a month. I’m 45 yrs old and would like to rollover to an IRA but would like to also take out 30% to pay down debt and establish a emergency cash fund while out of work. For the sake of discussion, what would the 2011 tax and penalties look like if I take out 1/3 of $90,000 in a 25% tax bracket making $40,000/yr? If it’s too steep, I may just bite the bullet and keep it all… Read more »

Brent
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Brent

If I’m going to roll over my 401K to a Roth IRA due to leaving the company does it follow that if a wait to time this roll over in a year where my income is at a much lower tax rate(due to being unemployeed etc)I will pay the loewer rate on the roll over? If I’m at 28% this year and rolloever the 401K to Roth I’d pay 28% on the roll over. If I wait until the following year where I may have income at a 15% rate does the roll over get taxed at that lower 15%… Read more »

Dennis Enrietta
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Dennis Enrietta

In Feb, 2011, I made an institution-to-institution transfer with funds going from my company’s 401K plan into a traditional IRA account at my local bank. The bank categorized it as a ‘rollover’. Now in Oct, 2011, I would like to make another move of exactly the same nature. My bank says I can only do this once a year. Is my bank correct?

bawstonboy
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bawstonboy

Was considering the rollover of a 403B account to an IRA

I cannot truly see any advantage to this other than my own “control” of funds– unlike I have now with my employer account.

Given the nasty economy of late — one wonders of any positive gains actually in keeping funds in the market at all! Perhaps buying a good race horse may be my option.

Michelle
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Michelle

I am 29 years old and have a 401k at my current employer as well as $30,000 in another 401k at my previous employer. Given my age and tax bracket (28%) should I roll my old 401k into my current one or do an IRA?

Nancy
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Nancy

My husband retired 6/30/11 with about $80k in a 401k. He will be rolling it over into an IRA but my question is will the amount he gets be figured on the rollover date, i.e., value as of 10/28/11, or the price at the end of the previous quarter, 9/30/11. When looking at the value in their website, the amount in the account only changes every quarter.

How to Rollover 401(k) to IRA

by Pinyo Bhulipongsanon time to read: 5 min
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