401(k) Rollovers and Rollover IRAs: A Step-by-Step Guide

Key steps include initiating your rollover without incurring taxes and finding the right home for your new IRA.

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If you have a 401(k) from an old job or an IRA from a previous life, a 401(k) rollover or rollover IRA could be a good way to save money, stay organized and make your money work harder.

Doing a rollover offers some sweet perks:

  • More diverse investment selection than a typical 401(k) plan.

  • Perhaps cheaper investments.

  • Lower account fees. Some 401(k) plans pass account management fees along to the employees, but many IRAs charge no account fees.

And the process is pretty straightforward: You open or have a new account, and you give instructions to your old account about where to send your money.

How to roll over a 401(k) to an IRA: Quick guide

Generally, there are two places you can put an old 401(k): into a new IRA or into a new 401(k). We address the latter a bit later in this article. But first, in about 500 words we'll cover what you need to know to do a 401(k) rollover into an IRA.

Step 1. Choose which type of IRA account to open

The rollover IRA route may give you more investment options and lower fees than your old 401(k) had.

  • If you do a rollover to a Roth IRA, you’ll owe taxes on the rolled amount.

  • If you do a rollover to a traditional IRA, the taxes are deferred.

  • If you do a rollover from a Roth 401(k), you won't incur taxes if you roll to a Roth IRA.

Step 2. Open your new IRA account

You generally have two options for where to get an IRA: an online broker or a robo-advisor.

  • If you want to manage your investments yourself, an online broker may be a good fit. Look for a provider that charges no account fees, offers a wide selection of low-cost investments and has a reputation for good customer service.

  • If you want someone else to manage your investments, a robo-advisor may make sense. A robo-advisor chooses investments and rebalances your portfolio over time — for a fraction of the cost of a human advisor.

Here are some of our top picks of the best brokers and robo-advisors for opening an IRA account:

» Check out our complete list of top IRA account providers

Step 3. Ask your 401(k) plan for a direct rollover

These two words — "direct rollover" — are important: They mean the 401(k) plan cuts a check directly to your new IRA account, not to you personally.

Here are the basic steps:

  1. Contact your former employer’s plan administrator, complete a few forms, and ask it to send a check or wire for your account balance to your new account provider.

  2. The new account provider gives you instructions for how the check or wire should be made out, what information to include and where it should be sent.

You can opt for an indirect rollover instead, which essentially means you withdraw the money and give it to the IRA provider yourself, but that can create tax complexities. We generally recommend a direct rollover.

Step 4. Choose your rollover IRA investments

Once the money is in your new IRA account, select your investments.

  • Low-cost index mutual funds or ETFs often make sense for many people. You might be tempted to pick individual stocks and bonds, but this is rarely the best approach for anyone but a professional investor. It’s easier to get diversification and better long-term results from mutual funds or exchange-traded funds (ETFs).

  • If you opened your new account at a robo-advisor, that company’s algorithms select your investments based on questions you answer.

That's it — doing a 401(k) rollover into an IRA can be just that simple. If you like, stop reading and get started with your new rollover IRA.

If you want more help or information, keep scrolling.


Things to know about doing a rollover

Finding the right account provider starts with knowing whether you're a "manage it for me" type or a DIY type.

Rollover IRA accounts for 'manage it for me' investors

If you're not interested in picking individual investments, a robo-advisor can do that for you.

Robo-advisors build personalized portfolios using low-cost funds based on your preferences, then rebalance those funds over time to help you stay on track, all for a much lower fee than a conventional investment manager.

Here are a few picks from our roundup of the best robo-advisors:

Rollover IRA accounts for DIY investors

If you want to build and manage your own investment portfolio, an online broker lets you buy and sell investments.

Here are a few picks from our roundup of the best online brokers:

If your 401(k) money was in a target-date fund, you can probably find a similar (and perhaps less expensive) one for your IRA at a broker. A target-date fund is a mutual fund that buys shares of other mutual funds, and its goal is to shift investments automatically over time as you approach a specific date, such as retirement.

Here are some popular target-date funds designed for investors planning to retire in 2045, ranked by 5-year annual return. We selected funds open to new investors with low costs (no sales commissions, and expense ratios of 1% or less) and minimum investments of $2,500 or less.

Symbol

Fund

Expense Ratio

Min. Investment

5-year annual returns

REHTX

American Funds 2045 Trgt Date Retire R5

0.43%

$250

8.59%

TLMPX

TIAA-CREF Lifecycle Index 2045 Premier

0.25%

$0

7.82%

FIOFX

Fidelity Freedom Index 2045 Investor

0.12%

$0

7.64%

TRRKX

T. Rowe Price Retirement 2045

0.71%

$2,500

7.59%

VTIVX

Vanguard Target Retirement 2045 Inv

0.15%

$1,000

7.26%

Data current as of June 10, 2020. 

» MORE: See our guide on how to invest in your IRA.

Are there any downsides of doing a rollover?

A rollover isn't for everybody. Leaving an old 401(k) alone can have benefits, too:

  • Your 401(k) is better protected from creditors.

  • Generally you can borrow from your 401(k), which isn't possible with an IRA (though IRAs sometimes allow early withdrawals).

If your ex-employer lets you, you can leave your 401(k) money where it is, but you likely can't ask HR any questions, and you may pay higher 401(k) fees as an ex-employee. To avoid that, you could do a 401(k) rollover that moves your money into your current employer’s retirement plan. Generally, there aren't any tax penalties associated with a 401(k) rollover, as long as the money goes straight from the old account to the new account.

Although this route may help you keep your financial life organized by having fewer accounts to keep track of, make sure your new 401(k) has investment options that are right for you and that you aren't incurring higher account fees.

What are the tax implications of a 401(k) rollover?

If you do a direct rollover, as discussed above, there are typically no taxes to consider until you start withdrawing money from your IRA in retirement.

Two other scenarios can cause trouble:

1. You cash out the old 401(k)

This is almost certainly the worst option. Not only does cashing out sabotage your retirement, but also the IRS could hit you with a 10% early withdrawal fee and income taxes on the distribution.

2. You do an indirect rollover that takes longer than 60 days

If you do an indirect rollover, the plan administrator may withhold 20% from your check to pay taxes on your distribution. To get that money back, you must deposit into your IRA the complete account balance — including whatever was withheld for taxes — within 60 days of the date you received the distribution. (The exception to this is if you want to open a Roth IRA, which will require taxes paid on the distribution, unless your money was in a Roth 401(k).)

  • For example, say your total 401(k) account balance was $20,000 and your former employer sends you a check for $16,000 (that’s the full account minus 20%). Assuming you’re not planning to go the Roth route, you'd need to come up with $4,000 so that you can deposit the full $20,000 into your IRA.

  • At tax time, the IRS will see you rolled over the entire retirement account and will refund you the amount that was withheld in taxes.


More questions about 401(k) rollover or IRA rollover rules? We have answers

What is a 401(k) rollover?

A 401(k) rollover is a way to move money from a workplace retirement plan to an individual retirement account, typically when you switch jobs or retire. You can also roll over a 401(k) into another 401(k).

What is a rollover IRA?

A rollover IRA is a vehicle for transferring money from a retirement account to an individual retirement account (IRA). One major benefit of a rollover IRA is that it can keep your retirement dollars safe from taxes.

A rollover IRA can be a traditional IRA, with the same withdrawal rules. Or, you can open a rollover IRA that's a Roth - that's what you would do to roll money from a Roth 401(k). You're allowed to roll traditional 401(k) money to a rollover Roth IRA, but then you'd owe income tax on the money you rolled over. The one main difference between a traditional or Roth IRA and a rollover IRA is that you can roll over as much money as you want into the rollover IRA. If you make IRA contributions in addition to your rollover, you're limited to the annual maximum of $6,000 in 2020, or $7,000 if you're age 50 or older. (In 2019, the limits were the same.)

Rollover IRAs are subject to the same withdrawal rules as all IRAs. Unless you have qualifying circumstances, a withdrawal from an IRA before you reach age 59 1/2 is likely to come with income taxes and potentially a 10% penalty from the IRS. Here are the traditional IRA withdrawal rules and the Roth IRA withdrawal rules.

Yes. The only cautions here are 1) contributions to an IRA are limited to $6,000 per year ($7,000 if you're age 50 or older), 2) if you chose a Roth IRA for your rollover, your ability to contribute may be further restricted based on your income, 3) if you mingle IRA contributions with IRA rollover funds in one account, that may make it difficult to move your rollover funds back to a 401(k) if, say, you start a new job with an employer with a stellar 401(k) plan, and 4) your ability to deduct your traditional IRA contributions from your taxes each year may be restricted if you or your spouse has access to a workplace retirement plan and you earn over a certain threshold. See IRA contribution limits for more details.

No. It is considered separately from your annual contribution limit. So you can contribute additional money to your rollover IRA in the year you open it, up to your allowable contribution limit.

No. But again, you'll need to abide by your annual contribution limits for future contributions to your IRA.

Yes. There is no limit to the number of IRAs you can have. However, you may find it easier if you keep your number of IRAs low, as this will make it easier to keep track of your funds and assess things like asset allocation.

Generally, you set up a rollover IRA so that you can move money from a 401(k) without paying income tax when you move the money. (If you were to simply withdraw the money from your 401(k), rather than roll it over, you'd owe income tax and probably an early withdrawal penalty.) A rollover IRA lets you move money out of a 401(k) without sacrificing the benefit of delaying your tax bill until retirement. While 401(k) and rollover IRA accounts have some similarities, they’re also quite different. Both types of accounts offer pre-tax savings: You can put money in before you pay taxes on it and you can delay your income tax payment until you take the money out in retirement. But with a 401(k), your investment choices are dictated by your employer. With an IRA, your investment choices are almost unlimited, because most brokers offer a wide array of investment options. On the other hand, 401(k)s offer a higher annual contribution limit of $19,500 ($26,000 of age 50 or older) in 2020, compared with the IRA contribution limit of $6,000 ($7,000 if 50 or older). (There's no limit on how much you can roll into an IRA from a 401(k).)

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