How to roll over your 401(k) to IRA

Summary

Can you roll over a 401(k) to an IRA?

Yes, you can rollover your 401(k) to an IRA.

However, there are certain rules around this process you must follow to avoid any unnecessary taxes or incur penalties.

One option is to do a direct rollover. Here, your 401(k) provider directly transfers your funds into your new IRA account. You never touch or physically move the money.

However, this isn’t always possible.

The alternative is an indirect rollover. Here, you withdraw the money and deposit it into your new account.

With indirect rollovers, you have 60 days from receiving the cash or assets from your 401(k) to transfer your IRA.  

If you miss the 60-day deadline, the IRS may view this as an early withdrawal, and you will have to pay tax and a 10% early withdrawal penalty.

You can also rollover your 401(k) into a Roth IRA. However, as a Roth IRA is made up of your after-tax dollars, you will have to pay taxes on the amount you roll over.

How to rollover your 401(k) to an IRA 

If you want to roll over your 401(k), you need to be prepared and act quickly.

There are a number of steps you have to follow, and here is a step-by-step guide on how to do it.  

1. Choose your rollover destination 

The first step is figuring out where you want to roll your funds.  

As mentioned above, you could do this manually or create an automatic transfer. In either case, you should know before you roll your money over where you will be moving it to. 

This can be a new IRA or one you have already contributed to.

When weighing up your options, pay close attention to any rollover fees and ongoing management fees that could erode your savings.

Speaking to a financial advisor could help you assess your options and decide what option can help you achieve your financial goals.  

2. Contact your current and new provider 

You will need to inform your current 401(k) provider that you intend to roll over your funds. You may need to include some details and contact information about your new IRA provider.  

Giving notice in advance will help you avoid early withdrawal charges.

Some providers may not let you do a direct rollover, so be prepared to do an indirect transfer if you have to.  

3. Contribute as normal 

Within approximately 60 days, you should be set up with your new IRA with your rolled-over savings.

From here, you can contribute as normal.

Remember that your rollover didn’t count as a contribution, so you can continue contributing to your IRA up to its annual limit.  

Why roll over your 401(k) to an IRA? 

If you change jobs, you may decide that moving your 401(K) to an IRA is a better option than leaving it with your old employer or incurring the withdrawal penalties and taxes and cashing it out.

You can also choose to rollover your 401(k) without the need to move jobs.

When a 401(k) account isn’t delivering the right returns, many employees start to consider whether moving their contributions into a personalized IRA account could be a better option.

IRAs often have more flexible investment options than 401(k)s. Additionally, if you already have retirement savings in an IRA, you might find it easier to keep all your money in one place.  

How much of your 401(k) can you roll over into an IRA? 

The first thing to know is that there is no annual limit to the amount of money you can roll over from a 401(k). You can transfer the whole amount without limit when you roll over your funds.

As mentioned, rolling your money over doesn’t count as a contribution.

However, there are annual limits to your contributions to an IRA. You can only contribute an annual maximum of $7,000 in 2024 on top of your rollover amount.  

Money rolled into a Roth IRA is taxable and needs to be held within the account for five or more years before it is withdrawn to avoid a penalty.   

5 advantages of rolling your 401(k) over to an IRA 

There are multiple advantages of rolling over your 401(k) to an IRA, including:

1. Increased investment flexibility 

One of the major advantages of a 401(k) rollover is the greater level of flexibility that an IRA can give you.

Whether you’re looking for a higher-growth option or want to invest in something else altogether, moving your 401(k) into an IRA puts you in control of your savings.  

2. Consolidating your retirement savings

If you have worked for several different employers, you may have some outstanding 401(k) accounts attached to each role.

Rather than risk forgetting about some of your accounts and missing out on your retirement funds, rolling your funds over can be a good opportunity to consolidate your 401(k) accounts into a single, more rewarding account. 

3. Potential reduction in fees 

Many 401(k) accounts come with fees that can affect the value of your savings.

Moving your funds into an IRA allows you to find an account with fewer charges or consolidate your charges by only paying fees on one account instead of multiple. This helps you preserve the value of your account.  

4. Increased planning flexibility 

IRA accounts often come with more flexible payout options.

Many allow you to withdraw some funds penalty-free in certain circumstances, and should you opt for a Roth IRA, your money will already be tax-optimized, enabling you to plan your future more freely.  

5. Improved estate planning 

With an IRA, you can name multiple beneficiaries to your cash and assets.

For this reason, an IRA can be more convenient when planning your estate.  

Use a financial advisor to manage your 401(k) rollover

While rolling over your 401(k) to an IRA has many advantages,

While there are advantages, rolling over your account isn’t for everyone. The process can be very complex and, if you’re not careful, could leave you with higher fees, reduced creditor protection, and a big tax bill.

A financial advisor can help you make the best choice based on your specific financial goals and circumstances and ensure the rollover process goes smoothly.

At Unbiased we work with regulated and fiduciary financial advisors from around the country, ensuring we have one to suit your unique needs. Connecting with an advisor is simple, easy, and free.

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