The good news is that rollovers are really easy to do. You do have to be careful, however, to avoid a few traps that could cost you a small fortune (I’ll cover those traps below). A 401(k) rollover requires just two steps: (1) decide where you want to open your rollover IRA account, and (2) initiate the transfer of your retirement account from your 401(k) to the new IRA. Let’s take a look at each of these steps in some detail.
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401(k) to IRA Rollover Checklist
Here are the steps to transfer a 401(k) to an IRA:
- Confirm that a Rollover is an Option: A 401(k) can be rolled over to an IRA. If you have or are considering other types of retirement accounts, check out this handy IRS rollover chart.
- Decide: Make sure that a rollover to an IRA is the best decision, keeping in mind that there are other options.
- Open an IRA: Decide where you want to open an IRA (we cover several options below).
- Initiate the Rollover: Don’t be intimidated. The process is easy as you’ll see below.
- Invest: Once your 401(k) funds have been transferred to your IRA, make sure they are invested in accordance with your investment plan.
Now, let’s take a deeper look at each of these options.
Is a Rollover IRA Right for You?
When you leave a job with a 401(k), you generally have several options when it comes to your retirement account:
- Leave the money in the 401(k). Depending on your balance and your former employer’s plan, this may or may not be an option. If it is, and if you like the 401k’s investments, leaving your money where in the 401k is a reasonable option. It’s what I did with one of my 401k accounts.
- Transfer the money to the 401(k) at your current employer. If you’ve taken a new job with a company that offers a 401k, you may be able to transfer your old 401k to your new retirement account. If you like the new 401(k)’s investments, this option allows you to consolidate all of your retirement investments into a single 401(k).
- Rollover the 401(k) to an IRA. This is the option we’ll focus on in this article. The one big advantage is that you decide where to open the IRA, so you have complete control over your investment choices.
Open an IRA
Before you can roll over a 401(k), you must first open the correct type of IRA account. There are several options here, and the three most popular choices are a brokerage account, mutual fund account or a robo-advisor.
Transferring a 401(k) to a brokerage account is ideal if you want to invest in a variety of stocks, bonds, and ETFs. Discount brokers now charge just a few dollars for equity trades, and most rollover IRA accounts have minimal (if any) fees. Having used Scottrade for my SEP IRA, I can attest to just how easy it is to buy and sell investments online.
As you review the best options for your retirement account, you’ll want to consider several factors. First, make sure the broker offers the type of IRA account you need. If you are opening a standard rollover IRA, you should find that every major online broker offers this type of account. For specialty accounts like a SEP IRA, however, you’ll find many brokers that do not offer such an option.
Second, you’ll want to evaluate fees. The fees to consider include both account maintenance fees and trading fees. Given the competition today among brokerage firms, you will find many low-fee options.
Learn More: Are Low Cost Investment Advisors a Myth?
Third, you’ll want to look at the trading tools. Many online brokers now offer virtual trading accounts, where you can practice trading without putting your money at risk. The best brokers also offer video tutorials on everything from evaluating stocks to trading options.
With these factors in mind, here are several top-rated brokers to consider:
You can open a rollover IRA directly with a mutual fund company. I have one with Vanguard. A mutual fund IRA is a perfect choice if you plan to invest only in mutual funds and ETFs offered by one mutual fund company. Why? Because the fees will be the lowest you can find. If you want to invest outside of a single mutual fund company, however, a brokerage account is the better option.
There are now several automated investment services, sometimes called robo advisors, that offer IRA accounts:
- WealthFront: I’ve had an account at WealthFront and am very happy with the service. The site is easy to use and offers very low fees.
- Betterment: I’ve also had an account at Betterment. It offers a service very similar to Wealthfront, including Rollover IRAs.
- TD Ameritrade Essential Portfolios: Finally, TD Ameritrade has just rolled out its own automated investment service with features similar to Wealthfront and Betterment.
How to Initiate the 401(k) Rollover
After you’ve decided where to open your IRA, the next step is to initiate the 401(k) rollover. Here are the steps I’ve taken to roll over my 401k to an IRA:
- Call your 401k Administrator: The very first thing I did was call my 401(k) administrator. My account was handled by Fidelity, so a call to customer service provided me with all the information I needed. The key questions to ask are whether there are any fees for rolling over a 401(k), and what forms you need to initiate the transfer. You can also speak with the person at your former employer who handles retirement accounts. However, in my experience, they will end up referring you to the company that manages the 401k(k)
- Call your IRA Administrator: Whether you’ve chosen a brokerage, mutual fund company, or robo-advisor for your new IRA, I’d highly recommend also calling them before initiating the transfer. I like to confirm what they need in order to complete the transfer.
- Initiate a Direct Transfer: There are two ways to roll over a 401(k) into an IRA: Direct transfer or check. I’ve always used the direct transfer method, personally. It’s easier since you never have to physically handle a check. Plus, it avoids the possibility of the IRS thinking you have taken an early distribution from your 401(k) — triggering taxes and (potentially) a 10 percent penalty.
Once you initiate the transfer, keep an eye on your accounts to make sure the rollover occurs without a hitch. These can take a few business days, and it always makes me nervous. Once the transfer is finished, your 401k rollover is complete. Now, you’re good to go!
Have you ever rolled your 401(k)? What was your experience and would you recommend it to others?