401(k) Rollovers: How to Roll Over a 401(k) to a No Fee IRA


When you leave your job you have three options for the money in your company 401(k) account:

  1. Leave it in the company plan
  2. Cash out
  3. Do a rollover to an IRA (Individual Retirement Account)

Leave it in the company plan – Some employers won’t even allow you to leave your money in the company plan once you leave, but even if you have this option you should probably avoid it.  Company 401(k) plans are notorious for hidden administrative and service fees.  A recent study by the U.S. Department of Labor found that fees and expenses in 401(k) plans often reduce retirement assets by over 25%.  Check the fees that your company 401(k) is charging, specifically any administrative fees and your funds’ expense ratios. If you are paying more than 1% total, you should get your money out of the company plan and into a lower cost IRA as soon as possible.

Cash Out – You have the option of liquidating your 401(k) retirement account when you leave your employer, but this is also a really bad idea for three big reasons.  First, there is a huge 10% penalty for doing this on top of the income taxes you’ll owe immediately on all the money you cash out.  So unless you really really need the money now, you should avoid this massive sacrifice of your hard earned wealth.  Second, 401(k) money is in a tax-advantaged account.  Tax advantages are really valuable, which is why the government limits how much you can put in every year.  Don’t give away this lucrative tax advantage that could help grow your savings to significantly more than they could grow to in a taxable account.  Finally, saving for retirement takes a lot of time. Cashing out savings that would otherwise compound for years in a tax-advantaged account will set you way back in achieving your retirement goals and greatly decrease the likelihood you will be able to retire when you want.

Roll over your 401(k) to an IRA – Doing a “rollover” from a 401(k) to an IRA just means moving the money from one tax-advantaged account controlled by your employer to another tax-advantaged account controlled by you.  There are three great reasons to do this.  First, the fees on most IRAs are much lower than the fees on 401(k)s because they usually lack the administrative and other overhead expenses.  In fact, some companies even offer No Fee IRAs.  We’ve compiled a list of some of the best No Fee IRA options at the end of this article.  Second, you will have better investment options in an IRA of your own choosing.  A 401(k) only gives you investment options that your employer or plan administrator chooses.  Often they are overpriced and underperforming due to lack of competition.  In an IRA you can invest in virtually any stock, bond, or mutual fund.  Finally, rolling all of your retirement assets into one big account allows you to easily manage your portfolio allocation and make better investment decisions by viewing your retirement assets holistically.

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3 Simple Steps to execute a 401k to IRA rollover:

1. Identify the IRA you want to roll over your assets to

  • Do you have an existing IRA?  If so, you can just roll your 401(k) assets into that one.  Just be sure to check that it’s not charging you hidden fees.
  • Do you need to set up a new IRA?  See the list at the end of this article for great No Fee IRA options.
  • Decide whether you need a Roth or Traditional IRA.  It’s easiest to roll a Traditional 401(k) (most) to a Traditional IRA or a Roth 401(k) to a Roth IRA.  From there you can rollover a Traditional IRA to a Roth IRA, if you want.

2. Tell your IRA provider (existing or intended) that you want to roll your 401k assets to an account with them

  • Existing Accounts: Fill out an online or paper “account transfer form” or call the IRA provider to make the request.  Have your 401(k) paperwork ready (account numbers).
  • New Accounts:  Open a new IRA by selecting “Rollover IRA” as the account type.  If this is not an option, choose “IRA” as the account type and “rollover” as your funding source.

3. Decide how to invest your assets in your new account

  • Once you put in the request to rollover your assets, your work is done.  Your IRA provider will contact your 401(k) provider and execute the transaction.  It may take a few days to process, but soon your account will be opened and your assets transferred.  Your 401(k) no longer exists and your IRA will be completely under your investment control.
  • A rollover is a great time to reevaluate your asset allocation and rebalance your portfolio.  Low cost index funds are generally a good choice for most retirement savers.  Asset allocation should typically get more conservative (higher proportion of bonds to stocks) as you age.  For example, a 30 year old might put 70% of his assets in a stock index fund and 30% in a bond index fund while a 60 year old might put 40% of his assets in a stock index fund and 60% in a bond index fund.

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