401(k) Rollover Guide

What is a 401k rollover?

A 401k rollover means that you take your 401k retirement plan with you when you leave your employer, and transfer your 401k balance to a new or existing retirement account. Under the 401k rollover rules, you can transfer your 401k balance to a Traditional IRA, for example, or roll over the 401k to a new employer. Therefore, you have several 401k rollover options.

The best option is do a 401k rollover to an IRA because you will have more investment options with an IRA. The 401k rollover rules allow you to leave your 401k with your old employer, but you would not be able to contribute any more funds to the old 401k plan. Therefore, with a 401k rollover to an IRA, you have more control and flexibility compared with leaving your old 401k with your former employer.

How do you rollover a 401k?

If you want to know how to roll over a 401k, the process is simple.There are three primary 401k rollover options:

  1. 401k Rollover ToTraditional IRA
  2. 401k Rollover To Roth IRA
  3. 401k Rollover To New Employer

401k Rollover to Traditional IRA: With this 401k rollover to IRA option, you convert your old 401k to a Traditional IRA. Under the 401k rollover rules, you can keep you investments tax-deferred and have much more flexibility and investment options than you likely have in your employer-sponsored 401k plan. The goods news is that a Traditional IRA may also have lower fees than after your 401k rollover compared with your old 401k.

401k Rollover to Roth IRA: With a rollover 401k to Roth IRA, you convert your old 401k to a Roth IRA. In this 401k rollover, you will have to pay taxes on the 401k rollover to IRA because Roth IRAs are funded with after-tax dollars. Since your old 401k was funded with pre-tax dollars, you have to do a Roth IRA conversion, which means you pay income taxes upfront and convert your old 401k to a Roth IRA. The process is simple and a popular strategy, and your earnings will grow tax free thereafter.

401K Rollover to New Employer: This process moves your old 401k from your previous employer to your new employer. Contact your new 401k administrator with your new employer to initiate the transfer process.

When investors ask “how do you rollover a 401k,” they also ask which of the 401k rollover options most people prefer. While it is based on your personal preference, the 401k rollover options that many investors prefer are the 401k Rollover to IRA or Rollover 401k to Roth IRA.

Why should yourollover a 401k?

There are several reasons to do a 401k rollover:

  1. Lower Fees
  2. More Investment Choices
  3. Robo-Advisor Options

Lower Fees: 401k plans tend to have high administrative fees and may use higher cost mutual funds. These higher fees in your 401k means you earn lower investment returns. When you do a 401k rollover to an IRA, there are often lower (or no) costs for an IRA

More Investment Choices: With your employer’s 401k plan, you likely were limited to several investment options. With a 401k rollover to IRA, you have much more flexibility to control your investments and select the investment choices that meet your specific investment goals. With a Traditional IRA or Roth IRA, you can invest in stocks, bonds, mutual funds, ETFs and other investment options. In comparison, a 401k plan typically does not permit you to purchase individual stocks. With a 401k rollover to Roth IRA or Traditional IRA, you also may get access to lower cost mutual funds and ETFs, which means you can potentially earn higher net returns.

Robo-Advisor Options: One of the popular 401k rollover options is to roll over your 401k to a Traditional IRA or Roth IRA with a robo-advisor. Robo-advisors are great options for investors who don’t want to manage their investment portfolio. For a lower annual cost, a robo-advisor will automate the management of your portfolio using computer algorithms based on your risk and return preferences.

Where is the best place to rollover a 401k?

When it comes to the best place to rollover a 401k, you have several options. We already addresses that you have 401k rollover options to an IRA or to a new employer. To roll over  a 401k to a new employer, you can contact your 401k plan administrator. Let’s focus on a 401k rollover to IRA, whether it is a Traditional IRA or Roth IRA.

A rollover 401k to Roth IRA or a 401k rollover to a Traditional IRA is a simple process. You can open an IRA retirement account online in minutes. If you want to manage your investments through a self-directed IRA, you can choose the best online broker to set up a Traditional IRA or Roth IRA. If you want your IRA to be managed by someone, you can choose from the best robo-advisors to provide an automated portfolio service that uses computer algorithms to invest in low-cost investments.

 You will be asked to enter basic contact information and then fund your account with the balance from your old 401k. Your new online broker or robo-advisor can help facilitate the transfer and 401k rollover.


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Overview

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Details

  • Supports personal brokerage accounts, joint brokerage accounts, traditional IRAs, Roth IRAs, SEP IRAs and trusts
  • Portfolio of low-cost, diversified ETFs
  • Free automatic portfolio rebalancing
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