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401(k) Rollovers: Your Complete Guide

401(k), Investing, IRA, Roth IRA
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When you leave a job, you may not realize that the money in your employer-sponsored 401(k) plan can leave with you. A 401(k) rollover allows you to transfer your balance into another retirement account — like an individual retirement account or your new employer’s 401(k) plan — while still keeping the money tax-deferred.

For many people, the best choice is to convert the 401(k) into an IRA, which will open the door to more investment choices. Of course, you can also leave your 401(k) with your old employer, if you’re happy with the plan. However, if you do that, you won’t be able to make additional contributions to it.

The three main types of 401(k) rollovers are:

  • 401(k) to traditional IRA: Allows you to keep your money tax-deferred, and may offer more investment options, possibly with lower fees.
  • 401(k) to Roth IRA: Also offers access to more investment options, though you’ll pay taxes on the rolled amount because it will be treated like a Roth conversion. (The exception is if you’re rolling over a Roth 401(k).)
  • Old 401(k) to 401(k) with a new employer: May be a sensible choice if you prioritize keeping your money in one account, and if your new employer’s plan allows rollovers and offers low-cost investment options (more on fees below).

For this guide, we’re going to focus on a 401(k)-to-IRA rollover. If you want to roll your old 401(k) into a 401(k) at a new employer, contact your current 401(k) plan administrator for rollover instructions.

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Why should you roll over your 401(k)?

The decision of whether to roll over your 401(k) to an IRA will depend on several factors. For many people, an IRA can offer benefits not found in a 401(k), including:

    • Lower fees: There are several IRA providers that charge no fees to maintain your account, but 401(k) plans frequently charge participants costly administrative fees.
    • Large investment selection: The typical 401(k) offers a curated selection of 20 or so investments. In an IRA, you’ll get access to a range of investment options, including stocks, bonds, mutual funds, index funds and exchange-traded funds. That wider selection also means you can easily shop around for funds with low expense ratios. Over the years, even small fees can have a big impact on overall retirement savings, which is why you want to minimize them wherever you can.
    • Access to low-cost advice: For many people, selecting investments is a confusing and stressful experience that often leads to sub-optimal portfolio construction and investment returns. If your new 401(k) provider doesn’t offer investment guidance and you want assistance, you can roll over your old 401(k) into an IRA with a robo-advisor. These services will manage your investments for you for a low annual fee.

Here’s how a one-time investment of $100,000 could be reduced by fees over 30 years:

Total fees on a $100,000 Investment
Portfolio fees 0.25% 0.50% 1.0%
Total cost of fees $40,415 $78,075 $145,844
Portfolio value after 30 years $533,934 $496,274 $428,505
(Assumes 6% annual return with no further contributions.)

If you still aren’t sure if you should roll over your 401(k), see our full list of the pros and cons of rolling over your 401(k) to an IRA.

How to roll over a 401(k) to an IRA or Roth IRA

There’s a right way to do this 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.

To protect your balance from taxes and penalties, there are certain steps you must take.

Roll over your 401(k) to an IRA in four steps

      1. Decide on a Roth or a traditional IRA. If you roll into a Roth IRA, you’ll owe taxes on the rolled amount.
      2. Open a rollover IRA account. Check out our detailed list of best IRA accounts to find a provider that offers exactly what you need.
      3. Ask your 401k 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.
      4. Choose your investments. Since they’ll enter the IRA as cash, you’ll want to invest your 401(k) funds — see the sections below on hands-off investing and active management for more on this.

Where to open an account

If you’ve decided a rollover is right for you, the next step is to make sure you find the best account provider to suit your needs. That choice starts with knowing your investing style — do you prefer to be hands-off with your investments, or to actively manage them?

Options for hands-off investors

If you believe in “set it and forget it,” it’s important to find a provider that will enable you to create a well-diversified portfolio that runs largely on its own. Robo-advisors are computer-based investment management services — these companies will build you a personalized portfolio using low-cost funds based on your preferences, then regularly rebalance those funds over time to help you stay on track for your goals. This is a great option for investors who want access to professional-caliber portfolios for a fraction of the cost of a human advisor. Wealthfront and Betterment are two companies that shine in this category.

BrokerHighlightsCommissionsAccount MinimumCurrent OffersStart Investing
Wealthfront
Wealthfront
Show Details
Free management on small balances; hands-off approach for IRA investors.
Commissions
0.25%management fee
Current Offers
$15,000
amount of assets managed with no fee
Open an account
on Wealthfront's secure website
Show Details
Betterment
Betterment
Show Details
Low-cost ETFs; automatic rebalancing; extensive advice
Commissions
0.25%management fee
Current Offers
Up to 1 year
of free management with a qualifying deposit
Open an account
on Betterment's secure website
Show Details
Wealthsimple - IRA
Wealthsimple - IRA
Show Details
Socially responsible investments; free tax-loss harvesting
Commissions
0.4%management fee
Current Offers
$50
cash bonus with deposit of at least $1,000 in first 30 days
Open an account
on Wealthsimple - IRA's secure website
Show Details

Options for Active Management

If you want to build and manage your portfolio yourself, you’ll want to open your rollover IRA with an online broker where you’ll be free to buy and sell a variety of investments. Look for account providers with a wide selection of investment options and low fees. TD Ameritrade shines in mutual fund selection with access to over 4,000 no-transaction-fee mutual funds, while Ally Invest is great for active traders with low commissions and an advanced trading platform.

BrokerHighlightsCommissionsAccount MinimumCurrent OffersStart Investing
Ally Invest
Ally Invest
Show Details
Impressive platform and research depth; low commissions
Commissions
$4.95
per trade
Current Offers
$200
in cash bonus with a qualifying deposit
Open an account
on Ally Invest's secure website
Show Details
Etrade
Etrade
Show Details
Large selection; reasonable commissions and fees
Commissions
$6.95
per trade
Current Offers
60
days of commission-free trades with a qualifying deposit
Open an account
on Etrade's secure website
Show Details

 

Note that your choice of IRA provider is not the biggest driver of your portfolio’s growth — the investments you select will determine that. However, selecting the right provider is critical for keeping fees low and gaining access to the investments and resources you need to manage your savings.

» Want more detail? We’ve spent over 300 hours researching the best rollover providers. Browse our our detailed round-up of the best IRA accounts to find one that’s right for you.