401(k) Rollovers: The Complete Guide

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When you change employment, you can transfer your 401(k) plan to an IRA and get additional investment alternatives, cheaper investment costs, and more financial flexibility. In the event that you find these features appealing, here are some tips for switching.

How to Get Started

The procedure of initiating a 401k rollover is relatively simple, involving the four steps listed below:

1. Select an IRA Type (Traditional or Roth)

Rolling your 401(k) into a Roth or traditional IRA has the same annual contribution limits as a traditional IRA. The SECURE Act of 2019 repealed the rule that contributions cannot be made past age 70½. To convert your 401(k) into a Roth IRA, you need to convert, as contributions are taxed. Traditional IRAs don’t require conversion or income tax payments.

2. Open an IRA Account

To open a new Roth or traditional IRA, choose a broker that accepts 401(k) rollovers and opens the account online or by phone. Consider providers like Fidelity, Vanguard, or Schwab for commission-free trades, low commissions for frequent trades, or a robo-advisor for a hands-off approach.

3. Request a Direct Rollover From Your 401(k) Plan Administrator

Direct rollovers are the simplest and easiest way to transfer funds between tax-deferred accounts. The 401(k) plan administrator sends a check to the IRA provider, depositing the funds in the IRA. This avoids penalties and unintended tax bills. Indirect rollovers involve personal deposit, with 60 days before taxes or penalties. Direct rollovers are often recommended.

4. Decide How to Invest Your Money

Money market accounts may grow less than they are for retirement, but they can preserve retirement balances. Long-term investors can invest in a diversified mix of stocks and bonds or choose individual stocks and bonds. Choosing investments depends on personal risk profile and appetite, including willingness to pursue portfolio growth at risk.

How to Choose an IRA Provider?

Choose a well-known provider with a good reputation for access to a wide variety of investments and low fees. These providers often have robust systems for interaction via websites or mobile applications. Choose investments that perform well and explore their offerings, trading platforms, and representatives.

Best for Hands-On Investors

Opening a rollover account with a traditional brokerage allows you to choose a portfolio of low-cost, diversified investments and allocate funds accordingly. Popular brokerages include Fidelity, Vanguard, Schwab, and E*TRADE, but personal preferences may vary, such as user interface or account minimums or fees.

Best for Hands-Off Investors

Robo-advisors like Betterment, SigFig, WealthSimple, and Wealthfront offer low-cost, diversified, and professionally managed portfolios for those without the knowledge to assemble and manage their own money, making it accessible to everyone, regardless of their financial status.

Pay Attention to Fees

Fees affect returns, with lower prices resulting in better returns. Consider long-term investments and consider commissions for long-term holding. Some providers offer bonuses for rollover IRA opening, but be aware that these may be taxable income.