How to Rollover Your 401k to an IRA

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Focus on and take control of your retirementOne of the ways you can improve your retirement investing is to roll your 401k over to an IRA. A rollover, if done right, can help you put your money into an account that sometimes offers more investment options than your company 401k plan offers.

If you are leaving your current job, some kind of a rollover might be necessary. You can roll a 401k from your old job to a 401k plan at your new job. However, if you aren’t sure what your options will be with a new job, it can be worth it to consider an IRA. Unless the current 401k plan is a great plan, you are likely to find that you are better off rolling over your account. However, you should consider your individual situation, and consult a professional, before making such a weighty decision.

How to Do a 401k to IRA Rollover

It’s usually fairly simple to do a rollover, especially if you are transferring the money from a 401k to a traditional IRA. Here are the steps to follow as you roll your 401k to an IRA:

  1. Open your IRA: The first step is to open your IRA. Anyone with earned income can open a traditional IRA, although there are income limits if you want to contribute to a Roth IRA. Find a broker that offers you adequate options, as well as one that provides low cost transactions. Many find that online brokers provide a wide variety of options, ease of investing, and simple processes to complete a rollover.
  2. Tell your employer about your decision: Once you have a place for your 401k money to go, you need to let the employer know. You can visit your human resources representative for more information about what paperwork you need to fill out. Make sure that you specify that you are doing a trustee-to-trustee transfer and that the employer has your broker’s information so that the check is payable to the investment company. Otherwise, if your employer makes out the check to you, you will end up being subject to a tax withholding and other penalties.
  3. Figure out how to invest the money: Once the transfer has been made, you will need to decide how to invest your money. Until you direct the investment of your funds, it will simply sit in a money market account.

Rollover to a Roth IRA

You can also rollover your 401k to a Roth IRA. However, there are additional considerations associated with a Roth IRA. Income restrictions on rollovers to Roth IRA accounts were lifted in 2010, but there are still issues to consider, such as the fact that hardship distributions can’t be rolled over.

For the most part, your biggest issue is likely to be taxes. A Roth IRA has a different tax advantage; you pay taxes on your income up front, but the money grows tax-free. A 401k, though, is a tax-deferred account, so the money is contributed before you pay taxes. The result is that when you accomplish a rollover, you will need to make up for the fact that you have received the tax benefit. In some cases, the taxes you pay outweigh the benefits of rolling your 401k over to a Roth IRA.

(Photo: s_falkow)

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7 Responses to “How to Rollover Your 401k to an IRA”

  1. CB says:

    Can you roll-over a 401k to a SepIRA?

  2. timparker says:

    It’s rarely a good idea to roll a 401(k) into another company sponsored plan. In any 401(k) you trade flexibility and efficiency for the employer match. Without the match, there are much better places to put your money than overpriced mutual funds. I realize that my statement is highly generalized but in my practice, I rarely find it to be untrue.

  3. timparker says:

    CB…yes you can do that.

  4. uclalien says:

    Here is a table showing 2012 Roth IRA Contribution and Deduction Limits:,,id=188238,00.html

  5. JoeTaxpayer says:

    Tim – in general, agreed. But (a) my plan has a .05% S&P fund, lower than I’ve seen anywhere. (b) those with post tax IRA money should convert to Roth before moving from 401(k) to IRA, so the pre and post tax money doesn’t get subject to prorating for partial conversions. Last (c) 401(k) can be withdrawn for separation after 55, unlike IRAs, 59-1/2. These may each be narrow exceptions but they add up.

    Miranda – I rarely recommend such a wholesale conversion. A transfer to IRA first allows a partial conversion each year to control taxes and one’s marginal rate. The 15% bracket for MFJ spans from a taxable $17,400 to $70,700 this year. The advice of “convert to ‘top off’ the 15% bracket is probably good for most readers.

  6. Perry Stubb says:

    I think it is a great idea to roll over your 401k to a roth IRA because of all of the benefits that you get with having a roth.

  7. Chris Dowling says:

    Switching jobs soon. Considerations for rollover IRA: Betterment vs. Personal Capital. Any opinions?

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