The best aspect of a 401(k) retirement savings plan is that, very often, your assets tend to be portable when you decide to leave a job. However, it can be extremely difficult to know just what exactly you should do with them. Because there are so many options available, it’s important to consider these before coming to a final decision, based on your own personal circumstances. But one thing’s for sure – more and more people are seeing the benefits of rolling over a 401(k) into an Individual Retirement Account (IRA), or a new plan. This is known as a 401(k) rollover.

Read on to learn everything you need to know about a 401(k) rollover to IRA — what it is, how to achieve it, and the multiple ways in which it could benefit you and your circumstances.

So, What Exactly Is a 401(K) Rollover?

Good question. Let us break it down for you. A 401(k) rollover occurs when you transfer the funds in your retirement account to a new plan, or an Individual Retirement Account (IRA). From the date you receive an IRA or retirement plan distribution, the IRS gives you 60 days to roll it over to a new plan or IRA. In a 12-month period, you’re allowed only one rollover.

You’re probably asking yourself repeatedly, “But what should I roll my 401(k) into?” This can often be a difficult choice, thanks to the abundance of options and benefits of each one. Keep reading to find out what you can choose from, or your “rollover options”.

Rolling Over Your 401(k) Into a Traditional IRA

If you’re retiring or changing your job, rolling over your 401(k)  to a Traditional IRA can be more flexible than other 401(k) rollover options. These are tax-deferred retirement accounts, and might just be perfect for your individual circumstances.

Benefits of Traditional IRAs:

  • Your savings can carry on growing tax-deferred.
  • You may be able to access investment choices which aren’t available in your former employer’s 401(k) plan.
  • You may be able to combine several retirement accounts into a single IRA, ensuring a smooth and stress-free experience.
  • Your IRA provider may offer extra services, such as expert guidance and tools for investing.

Drawbacks of Traditional IRAs:

  • You can’t borrow against an IRA in the same way you can with a 401(k).
  • Although this depends on which IRA provider you choose, you may be required to pay annual fees or other fees for keeping your IRA open.
  • You may also face higher fees for investing, pricing, and expenses than you typically would with a 401(k).
  • An IRA may not offer the same investments that a 401(k) plan offers.
  • Generally, your IRA assets are only protected from creditors in the case of bankruptcy.
  • Rolling over company stock may have negative implications on tax.

Rolling Over Your 401(k) Into a Roth IRA

Whether you’re starting a new job or heading into retirement, a 401(k) rollover to a Roth IRA can also be a great option for your retirement savings. Choosing to rollover your 401(k) to a Roth IRA can help you to keep saving for retirement while allowing any earnings to grow tax-free.

Benefits of Roth IRAs:

  • 401(k) contributions and earnings can be rolled directly into a Roth IRA tax-free.
  • Any additional earnings and contributions can grow tax-free.
  • You may have more choices for investment than what was previously available in your former employer’s 401(k).
  • Your Roth IRA provider may offer additional services, such as expert guidance and tools for investment.
  • You can combine multiple retirement accounts into a single Roth IRA to ensure the whole process is easy and stress-free.

Drawbacks of Roth IRAs:

  • You can’t borrow against a Roth IRA in the same way you can with a 401(k).
  • At the time of conversion, Traditional 401(k) assets that are rolled into a Roth IRA are subject to taxes.
  • At some companies, you may be required to pay annual fees or other fees for maintaining your Roth IRA. Plus, you may face higher fees for investment, pricing, and expenses than you did with your 401(k).
  • Some investments which are offered in a 401(k) plan may not be offered in a Roth IRA.
  • Generally, your IRA assets are protected from creditors only in the case of bankruptcy.
  • Rolling over company stock may have negative implications on tax.

Can You Move Your 401(k) to Cash?

The short answer is: yes. However, it’s important to be aware of what could happen if you do. Choosing to carry out a 401(k) rollover into an IRA is, quite simply, a wiser and more sensible option in the long-term.

Although withdrawing the funds from your 401(k) as cash can seem like a good idea at the time, it’s important to be aware of the consequences of doing so, if you’re leaning towards this option. Any money withdrawn from your 401(k) will be taxable and subject to a 20% federal withholding rate. On top of this, you may face penalties for early withdrawal.

Benefits of cash withdrawal:

  • Withdrawing the money from your 401(k) can be a helpful solution if you’re in a situation of urgent financial need.

Drawbacks of cash withdrawal:

  • The taxes and penalties incurred for opting for a cash withdrawal may be hefty.
  • If you decide to withdraw cash before you reach age 59 and a half, you may be subject to a 10% early withdrawal penalty, which will be taxed as ordinary income.
  • Your savings will stop growing tax-deferred.
  • Withdrawing your money early may have a serious impact on whether or not you have enough money for retirement.

How to Begin the 401(k) Rollover Process

So, you’re a little more clued-up about what a 401(k) rollover is. You’ve learned about the various different options that are available to you, and the benefits and drawbacks of each one. Now it’s time to start the process of your 401(k) rollover. Here are the four essential steps to do exactly that.

  1. Decide on a Traditional IRA or a Roth IRA.
    It’s crucial to know whether you wish to carry out your 401(k) rollover into a Traditional IRA or a Roth IRA. If you opt for a Roth IRA, it’s important to remember that you’ll owe taxes on the funds rolled over. If, on the other hand, you wish to roll over your funds without incurring taxes, go for the Traditional IRA. If you’re rolling over your funds from a Roth 401(k), this provides an exception to the rule. In this way, you won’t incur taxes when you roll over to a Roth IRA.
  2. Open your IRA account.
    Opening a rollover IRA account couldn’t be more quick and easy. Once you’ve decided on an IRA provider that’s right for you and your circumstances, they’ll ask you to provide some information, such as your date of birth and Social Security Number. This will ensure that the opening of your IRA account runs even more smoothly.
  3. Ask for a “direct rollover” from your 401(k) plan.
    These two words are essential to remember when rolling over the funds from your 401(k) to an IRA account. A “direct rollover” occurs when the 401(k) plan cuts a check directly to the new IRA account, and not to you personally.
  4. Select the right investments for you. 
    The funds from your 401(k) will enter the new IRA as cash, so the money will need to be invested. You can choose a provider who will select the right investments for you, and manage these for you. Alternatively, you can choose and manage your own investments.

So, now you know the basics of 401(k) rollovers, the ball’s in your court. However you choose to roll over your 401(k), there are plenty of options available, each of which are right for different circumstances. Whether you decide on a Traditional IRA, Roth IRA, or have chosen to go in a different route, it’s crucial to know as much information as possible.

To learn more about 401(k) rollovers and trading in general, join a webinar or alternatively get access to a free e-book, which discusses everything you possibly need to know to get started.

Author: Jeff Williams

Jeff Williams is a full-time day trader with over 15 years experience. Thousands of entry-level and experienced traders alike – day-traders and swing-trade small cap stock traders – credit Jeff with guiding them to turning small accounts into big accounts.

Jeff’s "Small Account Challenge" shows people how to transform accounts from a few thousand dollars into $25k, $50k or even $100k.

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