401(k) Rollovers: A How-to Guide

LAST REVIEWED Apr 09 2020 9 MIN READ

By The Human Interest Team

Navigating the pros and cons of a 401(k) rollover can be a challenge. With a few helpful tips, you’ll be on your way to a successful transition as you take control of your funds for the future. Consider the following information to help make the journey a smooth process:

Benefits of Rolling Over Your 401(k)

When comparing the benefits of rolling over your 401(k), consider the advantages available to you with an IRA versus a 401(k) to help make an informed decision.

Choosing to roll over a 401(k) opens the door for more choices. You’ll be able to relocate the IRA anywhere you prefer. This is especially advantageous when you already have a working relationship with a financial planner, advisor, or brokerage firm. While a 401(k) restricts investment and account options, an IRA is just the opposite, offering a diverse selection of options.

Since your 401(k) is through your employer, if you use a financial planner to manage it, they will not have the same ease of accessibility as they would with an IRA. This means your account will not have the benefit of being monitored and adjusted on a regular basis if necessary. Financial planners do have access to IRA accounts.

Some of the benefits of rolling over a 401(k) include less expensive investments, which depends on what your employer offers. It also means less expensive account fees. In some cases, fees are passed to the employee to pay while there is no account fee associated with many IRAs. If you are supportive of charitable giving, an IRA provides more tax advantages, as well.

If you have an interest in Roth conversions, it’s easier to do so with an IRA. This can be a benefit as you near retirement, as converting IRA dollars into Roth dollars puts investors in a lower tax bracket. This option is only available with an IRA.

How to Choose Your IRA Provider

The first thing to decide when choosing an IRA provider is how involved you want to be. This means deciding whether you are the type of investor who wants to oversee researching yourself or would rather have someone manage the process for you.

If you choose to do your own research to create a portfolio, as well as build and manage it, you may need the services of an online broker. By doing so, you’ll be able to buy and sell investments at your discretion. On the other hand, if you have no interest in researching and making decisions about investments to add to your portfolio, tap into available technology with an automated investment management service. An automated service is also referred to as a robo-advisor.

With the help of a robo-advisor, a personalized portfolio is built according to your preferences and specifications using low-cost funds. After the purchase, the robo-advisor maintains the funds on a regular basis, so the building of your portfolio stays on track. The building and maintaining of the portfolio are less expensive than relying on a traditional investment manager.

What to Do About an Existing 401(k) at Your Previous Employer

There are advantages and disadvantages of rolling a 401(k) into a Roth IRA. Consider these when making your decision to transfer your 401(k) to another company:

Advantages

If possible, do not remove your money from your employer’s plan. Taking this option provides you with more time to make an informed decision. You can take your time deciding the best move to make regarding your savings, which may include a new 401(k) or traditional IRA. While your savings remain with your employer, the 401(k) will remain under the plan’s rules, which includes withdrawals and choice in investments.

Along with no need for immediate action, earnings will maintain tax-deferred status until withdrawn. Distribution options, investment choices, loans, and other services such as guidance and investing tools may be accessible by leaving your 401(k) with your former employer. It’s also possible that your former employer’s plan will allow you to take a partial distribution.

Another option is to roll your savings into a new 401(k) plan if you’re starting a job with a new company. If this is an option, you may find your current plan and your new employer’s plan benefits may be similar.

Additionally, with a new 401(k), any accrued earnings are tax-deferred. If the new plan offers loans, you may be able to borrow against it. This is beneficial, as available assets of a 401(k) are generally protected from creditors making any claims per federal law. With a new 401(k), if you are still employed, any Required Minimum Distributions (RMDs) may be delayed past the age of 70 1/2.

A third option is rolling over your 401(k) into a traditional Roth IRA, which means more flexibility in how your savings are maintained and managed. This includes the ability to roll 401(k) earnings and contributions directly into a tax-free Roth IRA. Additional earnings and contributions are tax-free, consolidation of several retirement accounts into one IRA is allowed, and required minimum distributions are not required at the age of 70 1/2.

Disadvantages

If your goal is to borrow against your savings, this is not possible with a Roth IRA. Also, your traditional 401(k) assets will be subject to taxes, which takes place during the conversion of the 401(k) and Roth IRA.

Increases in annual fees, as well as investing fees, expenses, and prices, may cost more for IRA maintenance. There is the possibility that investments available with a traditional 401(k) may not be available. Unlike 401(k) assets that are protected by law from creditors, IRA assets are only protected from bankruptcy.

How to Start Your 401(k) Rollover

There are several steps you may need to take that will enable you to start the rollover efficiently.

  1. Choose the location where your money will go, such as a bank or brokerage firm. Ensure that whichever institution is chosen is backed by the Federal Deposit Insurance Corporation (FDIC).

  2. Decide if your account will be managed by you or an adviser.

  3. Choose how the money will be invested: a traditional IRA or other investment options such as exchange-traded funds, mutual funds, or stocks.

  4. Do your research and contact the institution to open the type of account that suits your needs and determine what the process is to begin the rollover process.

Start your journey into 401(k) rollovers with a one-on-one chat with the experts at Human Interest. We’re here to provide you with the resources you need to save the way that most benefits you.

We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment advising, and integration with leading payroll providers.

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