401(k) Rollover to IRA: 4 simple steps guide

When you leave a job to start a new one, you can either cash out your 401(k) retirement plan or transfer it into your new 401(k) account, or roll it over into an individual retirement account (IRA). For most employees, it is a smart choice to roll over a 401(k) into an IRA. A 401(k) rollover allows you to transfer money from an old (401k) account to an Individual retirement account or another 401(k) plan. Key reasons for a 401(k) rollover to IRA are more investment choices, lower fees, and the potential to open a Roth account, etc. 

401(k) Rollover to IRA: 4 simple steps guide
401(k) Rollover to IRA

Also Read: Withdrawing 401k from India and the associated tax implications

You are expected to transfer money from your old 401(k) to the new IRA account within 60 days. 

What are the advantages of rolling over a 401(k) to an IRA?

401(k) rollover to an IRA has multiple benefits, including more diverse investment options than traditional 401(k), minimal or no account fees (while some 401(k)s charge account management fees to employees), cheaper investments, etc. 

How to do 401(k) Rollover to an IRA

Here are a few steps you need to follow to roll a 401(k) into an IRA.

1. Decide the type of IRA account you want to open

2. Open a new IRA account

3. Select a direct rollover

4. Choose your investments

Step 1: Decide the type of IRA account you want to open

With a 401(k) rollover to an IRA, you have more investment options and fees will be lower than your old 401(k) plan. 

  • When you roll a 401(k) over into a Roth IRA, you will be liable to pay taxes on the rolled amount. 
  • in the case of a 401(k) rollover into a traditional IRA, the taxes are deferred. 
  • If you roll to a Roth IRA, you won’t incur taxes.  

Step 2: Open your new IRA account

Now the question is whether you want to invest the money yourself or rather have someone to do it for you. For which there are two options – an online broker and a robo-advisor. 

  • A robo-advisor would be a perfect fit for you If you’re not interested in picking individual investments. A robo-advisor can design a portfolio to cater to your needs using low-cost funds based on your preferences and rebalances those funds over time to help you stay on track. The fee is much lower than a conventional investment manager.
  • If you want to design and manage your own investment portfolio, online brokers allow you to buy and sell investments yourself. Search for a provider that offers a wide range of low-cost investments, charges no fee and is known for good customer service.

Step 3: Begin the rollover process

Start the paperwork to conduct your rollover. You have multiple options to transfer money from the old account to the new one, but direct rollover will be the best option. The direct rollover means the funds are transferred straight from your 401(k) into your new account, not to you personally. 

Here are the basic instructions:

  •  Get in touch with your former employer and complete a few formalities. Ask them to send a check or wire for your account balance to your new account provider. 
  • The new account provider will give instructions for how the check or wire should be made out, information to be included and where it should be sent. We generally recommend a direct rollover.

The plan administrator may hold 20% from your check to pay taxes on your distribution if you choose indirect rollover. To claim that money back, you must deposit the complete account balance into your IRA, including the amount withheld for taxes — within 60 days from the date you received the distribution. 

For example, say your total 401(k) account balance was $40,000 and you got a check for $32,000 (that’s the full account minus 20%). If you are not going to go the Roth route, you’d need to come up with $4,000 so as to deposit the full $20,000 into your IRA.

At the time of tax assessment, the IRS will confirm you rolled over the entire retirement account. The amount that was withheld in taxes will be refunded.

Step 4: Choose your investments

Once the rollover to your new IRA account is conducted, you can select your investments.

  • Low-cost mutual funds or exchange-traded funds (ETFs) are good options for common people. Mutual funds and ETFs offer easier diversification and better long-term results. While stocks and bonds may seem attractive, they are often good propositions for professional investors. 
  • Several 401(k)s allocate money into funds that buy shares of other mutual funds with the goal of diversifying investments automatically over time as you approach a specific date, such as retirement. If it suits your goals, you can find a similar target-date fund for your IRA at an online broker. 
  • Whereas a robo-advisor uses algorithms to select for you investments based on questions you answer.

What happens to your 401(k) when you leave a job?

When you leave an old job to start a new one, you have options to roll the funds into an IRA or keep it with the old employer. With a 401(k) rollover, you can keep your retirement funds organized and make sure you have easy access to them. You can also transfer the funds from your old 401(k) account to your new employer’s plan. 

Also Read: What to do with your 401(k) if you move back to India

As an NRI in the USA, you may have several questions regarding the 401(k) rollover to IRA, 401k withdrawal from India, tax implications on it, and so on and so forth.

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