When you take a 401(k) from an old job, you have a few options on what to do with it. But for many people, a great choice is to convert the 401(k) into an IRA.
Why a 401(k) rollover often makes sense
Rolling your 401(k) to an IRA offers some pretty sweet perks, including:
- A more diverse investment selection than a typical 401(k) plan offers;
- Cheaper investments (the cost comparison will depend on your employer’s investment offerings);
- Cheaper account fees. While some 401(k) plans pass account management fees along to the employees, many IRAs charge no account fees. If you’re confused by retirement account fees, jump to our fee glossary and 401(k) fee calculator.
Leaving money in a 401(k) has some benefits, too, including the fact that your 401(k) is better protected from creditors. Also, generally you can take a loan from a 401(k), which isn’t possible with an IRA (though IRAs offer some loopholes for early withdrawals). For more details, see our list of the pros and cons of rolling over your 401(k) to an IRA.
If you’ve decided a rollover IRA is right for you, here’s how to make it happen.
How to start your rollover
There’s a right way to roll over your funds from a 401(k) and a wrong way. You don’t want the 401(k) provider to cut a check in your name, and you don’t want to cash out your balance. In both scenarios, you’re at risk of owing up to a third of your balance to the IRS.
Take these four steps to roll over your funds without incurring any unpleasant tax surprises:
- Decide on a Roth or a traditional IRA. If you roll into a Roth IRA, you’ll owe taxes on the rolled amount. If you want to roll over your funds without incurring taxes, stick with a traditional IRA. (There’s an exception: If you’re rolling from a Roth 401(k), you won’t incur taxes when you roll to a Roth IRA.)
- Open a rollover IRA account. Opening a rollover IRA account is easy and fast. Once you pick a provider, they’ll ask for some information, including birthdate and Social Security number. To find the best provider for you, check out our top picks for the best IRA accounts, or see the next section for more context on this process.
- Ask your 401(k) plan for a “direct rollover.” These two words are important: They mean that the 401(k) plan will cut a check directly to your new IRA account, not to you personally.
- Choose your investments. Your 401(k) funds will enter the IRA as cash, so you’ll need to invest the money. You can choose a provider who will pick your investments and manage your money for you, or you can pick your investments and manage them yourself. More on that below.
How to choose your IRA provider
Finding the best account provider starts with knowing your investing style. Click on the link that describes you to jump to that section:
- I prefer to let someone else manage my investments for me.
- I prefer to manage my investments myself.
Rollover IRA accounts for ‘manage it for me’ investors
If you’re not interested in researching and choosing individual investments, you’ll need a provider to do that for you. An automated investment management service, often called a robo-advisor, is a good option. Robo-advisors will build a personalized portfolio using low-cost funds based on your preferences, then regularly rebalance those funds over time to help you stay on track, all for a much lower fee than a conventional investment manager. Here are some of our top picks in this category:
Rollover IRA accounts for DIY investors
If you want to build and manage your portfolio, you’ll want an online broker where you’ll be free to buy and sell a variety of low-cost investments. Here are some of our top picks in this category:
One thing to keep in mind: If you go with a traditional DIY broker, your choice of provider won’t be the biggest driver of a portfolio’s growth — the investments you choose will determine that. See our guide on investing in your IRA for more details.
» See all of our top picks for the best IRA providers to find one that’s right for you.