401K Rollover Overview

Rolling over a 401k into an IRA may sound daunting, but making that transition can be a good step in helping you take more control over your investments, and it’s likely much easier than it sounds. In fact, there is generally no cost to doing it except a bit of your time and the fact that your funds may be out of the market for a little while during the transition. Not only that, but it will likely save you a fair amount in investment fees over time by being able to choose your own investments. So, as long as the market hasn’t dropped a lot recently (meaning you aren’t pulling money out of the market/your 401K near the bottom), then it’s likely a great time to forge ahead.

When to Make the Move:

Before we dive into the rollover process itself, let’s discuss the three points in time when one can move funds out of a 401k. The typical time frame for someone to move assets from a 401k into an IRA is when one leaves one company for another. Once you are no longer at the prior firm, it can be a bit of a burden for that firm to keep track of your 401k, and vice versa, it can be a bit of a pain for you to keep track of it as well. So many people will move assets from their prior company’s 401k into an IRA Rollover (or new employer’s 401k if they allow you to do so).

The other obvious point in time when people move their assets out of a 401k, is when they retire. However, those are not necessarily the only two times one can transfer 401k funds. Many do not realize it, but most firms also allow you to move funds out of your 401k at some point in time even if you are still employed there. This is called an “in-service” rollover and is especially beneficial for those that have been with a company for a long period of time. Some employer plans may not allow it, but the majority do by the time you are 59 ½ and some even earlier.

Why Make the Move:

Let’s assume you are in one of those three camps, having a 401k at a prior employer, retiring soon, or being at an age where your employer allows you (generally once or twice a year) to roll funds out of your 401k and into an IRA. Why would you want to transfer assets in the first place? The primary reason to move the funds into an IRA rollover account is to increase your investment options. Most 401k plans are restricted in their funds options and are typically tied to a specific firm like Fidelity or T. Rowe Price and the investments they offer, or that the company has decided to offer. However, if you move the assets to an IRA, typically, the investment world is your oyster, and you can invest in a multitude of stocks, bonds, funds, and ETFs with very limited restrictions.

As mentioned initially, another reason to move assets out of a 401k is fees. In certain plans, a 401k can have higher costs (including administrative fees) than comparable performing funds that you can invest in on your own outside of the plan. Employees in large plans – more than 1,000 participants and $50 million in assets – typically pay just under 1% in fees, but can also pay fees as low as .25%, according to the latest edition of the 401k Averages book. In contrast, the average fee for participants in small plans (those with 100 participants and $5 million in assets) is 1.20%, but can range as high as nearly 3%.

Finally, there are certain estate planning benefits to having your assets in an IRA vs a 401k. These include, but are not limited to, the way the assets are treated if you were to pass away and being allowed to designate multiple beneficiaries or even have the assets assigned to a specified trust. Pulling funds out of a 401k will also allow you to invest in a Roth IRA (up to a certain limit each year if qualified) if you are willing to pay some taxes and open up and additional account to let the funds grow tax free. The one caution I will mention, is that if you happen to want to retire early (post 55/pre 59 ½), you may want to leave some assets in a 401k because there is something known as the “Rule of 55” which allows you to pull assets from a 401k after turning 55, but prior to turning 59 ½ without having to take any form of penalty as you would if you pull assets from an IRA at that point.

The Process:

So now that you know why it may make sense to rollover your 401k, how do you start the process? While your prior (or current) employer may be willing to give you advice on how to go about it, you actually need to start by either talking to a personal financial advisor, or simply contacting a good brokerage firm. I personally would recommend a low cost brokerage firm such as Schwab, Vanguard, or Fidelity and/or a “fee-only” advisor to start with, but some may prefer other options out there. Either way, they would be happy to assist you in setting up what is called an IRA Rollover account, that is specifically meant to allow people to move 401k’s, 403b’s, or other retirement accounts into a more flexible account.

Simply fill out the required paperwork and follow the institution’s instructions to open your IRA Rollover account. Once the account is officially opened, they will give you an account number. Then you can either talk with your advisor or the institution directly and they will explain how to start to move the funds over from your 401k. It usually involves a few simple steps, including having the specific account number for reference and talking to the 401k administrator at your prior firm (their contact information should be on your latest 401k statement) to get the process rolling.

Once the required details are determined then all that’s left to do is sell your holdings from the 401k you are rolling over, and move the cash via check or wire to the institution where your IRA is held. While you can have a check sent directly to you and then deposit the funds later, because you would have to deposit the funds into an IRA account within 60 days to avoid taxation and a potential penalty, I would highly recommend it be sent directly to the new institution if the 401k has a process for that. Then, once the funds are deposited in your new IRA Rollover account, in a few days, you or your advisor can go ahead and start investing the cash in whichever vehicles you prefer. With the new “open” account structure you can now invest in individual stocks or bonds, or other areas you were likely unable to invest in previously such as commodities, real estate investment trusts, or even socially responsible investment funds.

Start the Conversation