Rolling Over a 401(k) to an IRA

September 21st, 2018

Have a 401(k) but have since left that employer? Then you might want/need to rollover your 401(k) to an IRA (individual retirement account).

What does it mean to rollover a 401(k)?

It’s basically transferring the money you have invested in your 401(k) to an IRA, or potentially to a new 401(k) if your new employer allows it. In addition to the money you’ve contributed to your 401(k), you’ll also be able to take the portion of your employer’s match that has vested.

Why do it?

For starters, some employers won’t let you stay invested in your old 401(k) after you’ve left the company, so you’ll need to roll it over. Others may allow you to keep it, but you might still want to roll it over for a few reasons;
• More investment options – Usually your 401(k) will have a limited number of investment funds to choose from. With an IRA, you’ll have a much wider range of choices – basically any kind of stock, bond, fund or other investment security you want.
• Easier to keep track of your accounts – Trying to keep track of multiple 401(k)s from previous employers can be a hassle from an administrative perspective, so transferring your accounts to a single IRA can make the process easier.
• More flexibility – In addition to more flexibility with your investment choices, IRAs can sometimes offer more flexibility when you’re ready to take your money out in retirement. Your 401(k) may require you to take it all out in a single lump sum.

Why you might not want to

While rolling over can be a good idea, it isn’t always, particularly if your 401(k) offers lower fee investments. 401(k) plan sponsors can often negotiate lower fees on your selection of investments than what you’ll see when you sign up for an IRA, so you’ll want to compare what you’re currently paying in fees with what you would be paying in an IRA.
If you do rollover to an IRA, you’ll also want to watch out for potential conflicts of interest if an employee of the firm offers advice on particular investments. Some investments will have additional fees and commissions that you don’t want to pay, so make sure you understand what fees are involved and how the person recommending the investments gets paid.

How to do it

Step 1) Set up an IRA. When comparing offers, you’ll want to decide between a Roth IRA (you pay income taxes before depositing your money but not again when you take it out) or a traditional IRA (your taxes are deferred until you take the money out). A traditional IRA will be closer to most 401(k)s (unless you have a Roth 401(k)).
Step 2) Transfer your funds. Contact your previous employer or third party administrator (the financial firm that manages your 401(k) plan) and tell them you want to do a direct rollover to your new IRA. This means the funds will be transferred directly to your IRA rather than to you personally. If the money goes to you, you’ll only have 60 days to deposit it in the IRA without it being taxed as income.
Step 3) Choose your new investments. When the money rolls over, it will be deposited as cash, so you’ll need to select which investments you want to own. We can help you think about this in our core sections on investing.


Overall, rolling your 401(k) to an IRA can be a good idea if you’re able to invest in a wider range of lower cost funds and if you want to limit the number of investment accounts you have. However, it’s not always a no-brainer since some 401(k) plans have negotiated lower fees on their funds, so you’ll want to check before you make the switch.


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