401(k) Rollovers: How to roll over a 401(k) to a No Fee IRA

retirementahead

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.

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.

No Fee IRAs

The following companies offer no fee IRAs with great investment options that make sense for retirement investors.

Best Overall Value IRA

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Best IRA for Inexpensive Stock Trading

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  • Asset classes include stocks, bonds, options, forex, ETFs, and mutual funds
  • Read the full NerdWallet review of TradeKing
Best IRA for Beginners

  • No Fees, No Minimums
  • Purchase low cost index funds for as low as $500
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  • 1,300+ No Transaction Fee Mutual Funds
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  • Free research reports
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  • Asset classes include stocks, bonds, futures, options, forex, ETFs, and mutual funds
Best IRA for Options Traders
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  • Free research reports
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  • Asset classes include stocks, bonds, options, ETFs, and mutual funds
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Best IRA for No-Fee Mutual Funds

  • Offers the most No Foreign Transaction Fee Mutual Funds (4,500+)
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  • Check writing
  • Stock trades are $8.95
  • Assets classes include stocks, mutual funds, bonds, futures, ETFs, and options
Best IRA for Index Funds

  • Excellent selection of very low cost index funds
  • Average expense ratio is 83% less than the industry average
  • Offers 120 Vanguard funds and 52 Vanguard ETFs
  • Not ideal for those who want to trade stocks ($20 per stock trade)

Photo credit:  Retirement Ahead Sign by Shutterstock

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  • adfaf

    Excellent Simple explanation…Good Job…

  • 12345

    Your article is very misleading in the way it trys to scare people out of their 401k plan. Most companies cover the administrative fees for the participants so the only fees participants usually have are the internal expenses of the funds. It’s also common that a participant can buy a more favorable share class through their 401k plan than they can on their own, without paying upfront sales charges. It’s worth a closer look to compare a person’s prior and future employer’s plans, and then compare to their IRA options.

    • Joanna Pratt

      While large companies typically cover administrative fees most smaller companies, where the majority of Americans work, pass these fees on to plan participants. There also may be hidden “revenue sharing” expenses where the plan uses your high-expense fund fees to cover the administrative fees. If the company really is covering all fees, there might be no reason to leave, but participants should read their plan details because many expenses are well hidden.

      I disagree with the claim that you are getting access to something special when staying in a company 401(k) plan. The empirical evidence is overwhelming that low-cost index funds outperform almost all actively managed funds and these are available to everyone at no upfront cost (for example, Vanguard). Even if you feel the need to go with an actively managed fund, thousands of the best actively managed funds in terms of risk, return, and expenses are available to anyone with no upfront sales charge.

      So yes, if you work for a large, prosperous company that pays all expenses and subsidizes low-cost funds you wouldn’t be hurting yourself to stick with them, but you can do just as well with a low-cost index fund IRA at a place like Vanguard and be confident you aren’t getting secretly ripped off.

      • Bitter Lawyer

        Disagree with the bulk of what you are saying. The majority of Americans work for small companies? How do you define small? The US Census Bureau shows that 51% (61,209,560/120,903,551) work for companies with more than 500 employees. This number also ignores the 22 million that work in the public sector and may have access to preferable savings vehicles, the 457, instead of or in addition to any grandfathered 401(k). So your one size fits all IRA solution is irresponsible at best or intentionally misleading at worst.

        Citing to a report that encourages the increasing number of people investing in 401k plans to look at and understand the fee structure, is not an endorsement of IRA’s nor an implication that the same fees do not exist in IRA’s. In fact the most recent GAO report on Defined Contribution plan rollovers to IRA’s noted “IRA fee information is especially difficult to find and, if it is located, to understand. Our review of websites of 10 large IRA providers showed that IRA fee information was generally scattered across the providers’ websites in multiple documents, making it difficult to identify all applicable fees.” Moreover “there was no requirement that plans explicitly disclose that IRAs may have higher fees than investments in a plan.” “Additionally, in light of the marketing efforts of IRA providers –which our website review found can include claims that IRAs are “free”—as well as the recent spotlight on 401(k) plan fees, highlighted by Labor’s new fee disclosure requirements, simply stating that fees and expenses could be “different” may not be sufficient. Such statements may not clearly convey to participants that they could pay more for investments outside of a plan or the long-term effect of higher fees on their retirement plan savings.”

        You can disagree that you don’t get access to something special when you stay in a company plan, but a review of the IRA providers you list does not support that claim. You seem to be laying claim that expense ratio is the be all end all and Vanguard is the holy grail (Vanguard funds are great for indexing), but etrade which you list as best for beginners cheapest large blend index will cost you .11% or transaction fees to get Vanguard, similarly TD Ameritrade which you refer to as the best overall value IRA does not offer Vanguard funds and will cost you transaction fees. Even Vanguard itself may not offer you the best price on large blend index unless you have the 5 million dollars necessary to buy institutional shares that may be available through an employer plan. Not to mention large plans may offer free investment/managed accounts and free financial plans.

        Your assertion that an IRA offers more investment choices and is therefore superior contradicts the empirical data that shows that the average investor lacks the knowledge to make complicated financial decisions. Limiting the menu of options to core asset class not only helps in offering the most skillful managers, but it also simplifies the investment decision for participants.

        As the poster above noted “It’s worth a closer look to compare a person’s prior and future employer’s plans, and then compare to their IRA options.”

        • Joanna Pratt

          Thank you for your comment, but I strongly disagree.

          # of Americans working in small businesses: The Small Business Administration says 52%. You say 49%. Either way, approximately half of Americans work in small businesses and therefore have an opportunity to bring up 401k issues with their employer. I would encourage employees of larger businesses to do the same.

          IRA fee information: While many companies may mislead on IRA fees, all of the IRAs we recommend are no fee IRAs so the only fees associated with them are the expenses of investing in the funds (expense ratios and any transaction fees), all of which are disclosed by law at purchase.

          401k’s offering something special: There are some large employer plans that offer special access to funds that would be more expensive or impossible to get on your own, but this is definitely the exception. We encourage investors to look at what their plan offers and then compare it to what is available to them in an IRA. In most cases, the 401k does not offer something better.

          More investment choices in an IRA: A company 401k gives you a limited set of funds to choose from. You can open an IRA anywhere and choose almost any fund or stock or other asset so there are definitely more options in an IRA. I don’t buy your argument that investors need to be protected from themselves. Anyone reading articles about their investment options is smart enough to figure out how to buy a stock index fund and a bond index fund. And even if they’re not, the menu of options offered by most 401k plans is often worse that choosing a fund completely at random from a low cost provider.

  • phenomenalboo

    Thank you for this easy to understand article. It’s just what I needed!

  • Bob

    the article won’t be on long it tells the truth about a 401k you have no control of your money like you do in a ira

  • Mike G

    Nice job! Thank you for the information.

  • Maxime Rieman

    The Forbes article assumes that you already have a new job and 401(k) plan available to roll your old plan into. And it’s true, if you want earlier access to your retirement account, a 401(k) is probably a better option than an IRA.

    However, the Forbes article makes several assumptions, which may not apply to your situation. Does your employer offer free financial advice? Are you concerned about a lawsuit? Does your employer offer access to unique or particularly low-cost investment opportunities?

    Each strategy has benefits and downsides, which you need to weigh given your unique situation.

  • confused

    I had to retire at 64 because of an injury. My retirement account has $140,000. Could anyone help me with what to do with it. I will be receiving very little in retirement and soc sec. so I will need all I can get.

    • Nate

      1) Roll your retirement account into a Self directed IRA. 2) Join a local REIA (real estate investing association) and become a private lender to RE investors. The return on your invested money from your self directed IRA will remain Tax free! Not only will your IRA grow, but your retirement will be backed by a hard asset that retains value where as a 401k is only building value if the stock market is moving up.

  • hrdworknFool

    While all of this is interesting, it is also narrow. So focused on fees and how much it detracts from overall growth. It fails to include the cost of “self directed IRA”. It takes time and education to understand investing to avoid loosing more of the IRA funds that you pay in fees. So narrowly focused on fees is a scare tactic. I wonder how the author benefits from espousing such a narrow view. If you do not have the time in your 60 hour week to monitor investments, use the wonderful tools to guess where the market is going and execute the $10 trades, you stand a greater chance to loose more than if you pay the 1% commission to earn on average 3%, providing a growth of 2%. I have multiple pieces,401K, IRA, Money Market (post tax). My full time job that allows me to put 22K a year into 401K does not leave me time to manage the details of my IRA and Money Market. Personally, TD Ameritrade cost me nearly 4% of a 125K account in less than 90 days and that was in their preservation of capital plan. On top of that the final fees charged for 90 days was nearly 1%. In summary, this is such a narrow focus as to do damage to the reader. IMHO

    • Nunov Yerbidness

      I wonder how I would replace the company’s matching 401(k) contribution. To me, it seems like an IRA is great if 1) you don’t have access to a contribution-matching 401(k) or 457 plan, and 2) you have the time and investment savvy to keep watch over your account.
      I’m leery of investment products that dance all around their “fees” and “loads” and the like in their glossy brochures and Web sites. I’ll stick with the 401(k) for now, thanks.

      • Michael Fegan

        You both are missing the point that rolling over a 401K usually only happens when you change jobs or retire. When you retire, you probably won’t be working 60 hours a week and you certainly won’t be getting a match from your employer. If you retire or change jobs and do not roll the money into an IRA or to your new employers fund if it’s any good, your money is still in your former companies 401K will be under their power and control, or more precisely, the fund administrator. If the company should change fund families from say, Vanguard to T.Rowe Price, or any other fund managers, what will your position be then? You will not have access to the same fund managers or the same funds. Depending on the new arrangement, you may only get to chose from a small selection of the total funds of that family. This is very common. So instead of being able to choose from as many as 200 funds (for example only) the new fund may offer only 8 funds. Sounds silly doesn’t it? Yet it happened to me and everyone else where I work. And I work at a place everyone who reads and/or writes about this article should recognize. So in the end, if you are leaving your job, leave with your 401K rolled over into something more beneficial and which you have more control over, Otherwise, leave your funds alone.

  • angibroni

    I hope to retire in four years. I have two brokerage accounts. When should I transfer these stocks to an IRA? What is the downside to doing it soon? Later?

    • Maxime Rieman

      The real benefit of an IRA is the ability to invest your money in a tax-benefited account over time. Without that, an IRA is quite similar to a brokerage account. If you’re going to retire in four years, it’s still helpful to contribute to an IRA, but there’s no need to transfer your investments over.

  • Road Warrior

    Just to show how 401-k’s have too many fees….I had been self-employed until I sold my business last year (so I am 59 and semi/retired). I had a self-employed Solo 401-k, which I went to managing myself once I sold my business….about 1 1/2 years before I sold the business I rolled it from fund managers where I had no idea what the fees were to a major firm (who has the money on deposit). The 3rd party administrator still charged me a yearly management fee, even though all they did was prepare the government required paperwork for 401-k’s…there were going to be additional distribution fees of $ 75 for every disbursement upon retiring (like paying ATM fees to get your own money) in addition to other management fees (and remember they did not have my money and had no decision’s on any investment choices. So, since I am already 59 1/2 I decided to roll this over into my IRA (located at the same branch that the existing self-employ 401-k was held. I alerted the 3rd party administrator and after a month had passed since I did the rollover, they sent me an e-mail with a bill saying I owed $ 350.00 for the yearly fee (which had been a normal year-end fee until they went to a monthly billing at 1/12 each month). Plus they billed me $ 150 for an amendment fee (to a plan that no longer exists mind you). $ 300.00 for a solo plan re-statement fee (required by the government every 6 years)…but I had alerted them in early June that I was terminating the plan and rolling it over to my IRA. They also included in the bill $150 for a final 5500 form for 2014, plus a $ 75.00 Distribution fee on money that has been gone from the original account to my IRA for a month. In total the fees that they want to “back-charge” me $ 1,050.00, after I did the rollover. So, this is hard facts….not hidden costs….this is what they want me to pay on a plan that they only set-up and have no say over, other than yearly 5500 filings.

    In summary, the lady who spoke of an no fee IRA account being the better way to go is exactly right. The people who disagree with her are either naive to what the fees really are, don’t know what the fees are, because they are hidden…and in almost all of disagreeing arguments, you are just not correct. The only real values of a 401-k are the ability to borrow from it and the ability to put a larger amount of savings in it from catch-up contributions, profit sharing and salary deferrals etc
    I know I am going to have to fight with them over these fees that they want me to pay even though I told them ahead of time that they would not need to do the restatement and they were the 3rd party administrator for less than half the year.
    So in most cases a no fees self-directed IRA is a much better way to go and if you don’t feel confident about picking your own investments an Registered Financial Advisor can help (also for a fee).