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

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

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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.

Check out our favorite IRA providers >

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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  • Mutual Funds: $9.95 to buy/sell
  • Customer Service: Available business hours on weekdays only
  • Account Fees: $50 to close and/or transfer funds out of your account
  • Account Minimum: None
  • Stock and ETF Commissions: $4.95
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Best IRA for Options Traders

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  • Mutual Funds: $20 to buy/sell
  • Customer Service: Available 7am-7pm CT on weekdays only
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  • Stock and ETF Commissions: $4.95
  • Mutual Fund Commissions: $20
  • Learn more about Optionshouse
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Best IRA for No-Fee Mutual Funds

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  • Commission: $8.95 per trade
  • Account minimum: $0
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Best IRA for Index Funds

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  • Mutual Funds & ETFs: 120 Vanguard mutual funds and 52 Vanguard ETFs
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  • Account Fees: None (If account balance exceeds $10,000 OR you are signed up for electronic documentation)
  • Account Minimum: $3,000 ($1,000 for any Vanguard Target Retirement Funds or for Vanguard STAR Fund)
  • Stock Commissions: $20.00
  • Sign up for Vanguard
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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.

  • 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.

  • Ram

    I just read an article at Forbs which says do not rollover 401k to IRA here http://www.forbes.com/sites/financialfinesse/2013/01/24/7-reasons-not-to-roll-your-orphan-401k-to-an-ira/ , but after reading this I am confused

  • 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.

  • 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

  • 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?

  • 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).

  • Mag

    Thanks

  • Mag

    Rollover to gold is what I did and no regrets at all!
    For more information about investing in Gold I can recommend iragoldauthority dot com

  • Vick

    Read a good review about the best rated gold company on:
    iragoldauthority dot c o m

    Can be very helpful.

  • extralargeexhort

    great video telling the truth, I did not need to buy the program to know it is a scam?, i use ANDY LANK CASH FLOW for daily income.

  • Louise D Seven

    I have been working for the State of Rhode Island for 22 years. I plan on moving to Ohio to be near my children and grandchildren. I am at a loss right now and do not know what to do. Can someone help me please? I am going to need to find someone who can do all the paperwork and so on because I am a paperwork slacker. I am in a distraught state of mind and am very afraid of this huge move in life.