Should I Rollover My 401k to An IRA?

People leaving a job often have to decide what to do with their 401k accounts. The basic choices are:

  1. Cashout the account (usually not a wise choice due to taxes, penalties and the long-term damage done to retirement savings. Our 401k Cashout Calculator can help you see the impact.)
  2. Do nothing and leave the 401k balance with your former employer, or
  3. Rollover1 the 401k into another tax-advantaged retirement vehicle
  4. Another possibility is using a 401k rollover to start a business. These ROBS rollovers are being touted by some financial advisors as a wonderful innovation. However, the IRS frowns on ROBS and the track record of these 401k business startup rollovers is not very good.

People choosing the third option have a few choices as to where they can rollover their 401k balance to:

Rollover From a 401k To:
Roth IRA
Traditional IRA
Simple IRA
SEP IRA
457 (Gov’t)
Another 401k or Other Qualified Plan
403b
Designated Roth Account (401k, 403b, or 457)
YES
YES
NO
YES
YES
YES
YES
YES

A 401k to IRA rollover is the choice of many people. There are several reasons for this. For one, an IRA 2 is under the direct control of the account owner. There is no employer/plan sponsor calling the shots on what investment options are available or who will administer the plan. The account owner (you) can choose where your IRA account will be and what the investment options will be available. Some IRA owners even opt for a self-directed brokerage accounts where they can buy and sell individual company stocks or other securities. Of course, this only makes sense if you are comfortable with the complexities of investing. For most people, investing their retirement accounts in mutual funds managed by investment experts is the preferred route.

Another potential benefit of a 401k to IRA rollover is that, by shopping around, the account owner may be able to reduce the administrative expenses associated with the account.

Also, most people have several employers and different 401k accounts over the course of a career. The 401k to IRA rollover technique allows the owner to consolidate the balances from these accounts into a single IRA.

How to do a 401k to IRA rollover

The process to rollover a 401k to an IRA is straightforward:

  1. The most important step is to research financial firms where you are considering placing the IRA and discussing the transaction with a trusted financial advisor.
  2. Select a firm and open a traditional IRA account
  3. Request the necessary forms from the employer holding your 401k
  4. Process the paperwork being sure to clearly identify where the 401k account balance is to be sent
  5. Verify receipt of the funds and begin managing your IRA account.

Bottomline: In many cases, a 401k to IRA rollover is the best option when leaving a job. You have the opportunity to consolidate accounts, reduce administrative costs and improve the range of investment options available to you. But a rollover is an important decision. There are many factors specific to each person’s situation that need to be weighed. You should always seek the counsel of a trusted advisor before committing to a 401k to IRA rollover.


Notes:
  1. A rollover is a tax-free distribution of cash or other assets from one retirement plan to another retirement plan. The contribution to the second retirement plan is called a “rollover contribution.” A rollover occurs when you withdraw cash or other assets from one eligible retirement plan and contribute all or part of it within 60 days to another eligible retirement plan. []
  2. individual retirement account []