How to roll over a 401(k) to an IRA in 5 steps

Rolling over an old 401(k) after you leave your job is easy, but how does an IRA rollover work? Though there is usually no time limit to move your old 401(k), you won’t want to wait too long. Out of sight, out of mind! Here’s how to roll over your old 401(k) in 5 steps.

How does an IRA rollover work? Rolling over an old 401(k) to an IRAHow does an IRA rollover work? 5 step rollover process:

  1. Open a new IRA if you don’t already have a traditional IRA
  2. Call the number on your 401(k) statement or go online to request a direct rollover to your IRA
  3. A check will be mailed to you made payable to the financial institution where you have your IRA, for your benefit
  4. Deposit the check in your new IRA
  5. Invest the cash

Step #1: Opening a new IRA

One benefit of rolling over your old 401(k) to an IRA is consolidating accounts with one custodian (the financial institution) like Fidelity or TD Ameritrade. You can usually roll your old 401(k) over to an IRA at the same place your 401(k) is held, but you may not want to. Consider cost, investment options, where your other accounts are, user interface, etc. when deciding where to open your new IRA.

If you are a doctor or other professional with increased risk for a lawsuit, consider creating new IRAs for each old retirement plan you roll over. And as part of the asset protection strategy, don’t add any new funds to your rollover IRAs.

For most investors, especially with small rollovers, this isn’t necessary and can add to the hassle of managing your retirement accounts.

Step #2: Requesting a 401(k) rollover to your IRA

Call the plan provider (not your company) or go online to request a direct rollover to your IRA. You may want to wait 30 days so your HR department to inform the plan that you have left the company.

Tell the plan provider (such as Fidelity) that you no longer work for that employer and want to request a direct rollover to an IRA. Ask them if you have to complete paperwork. If so, ask where to send the completed paperwork. Ask for a timeline, confirmation number, etc.

They will sell your investments in your 401(k) and mail you a check for the amount as of close of trading.

A direct rollover means the check isn’t made payable to you; it’s made payable to the financial institution for your benefit. For example, if you opened an IRA at TD Ameritrade, ask the 401(k) plan provider to make the check payable to ‘TD Ameritrade FBO John Doe’. (FBO = for benefit of).

(Tip: prior to calling your plan provider, call your rollover IRA provider and ask how your 401(k) should write the check and your options for depositing the funds.)

Step #3: Wait for your 401(k) rollover check

Your rollover check will be mailed to your home. It usually takes 7-10 business days. Make sure your address is current! It comes in a nondescript envelope. DON’T THROW IT AWAY! It happens…

Step #4: Deposit your 401(k) money in your rollover IRA

When you receive the 401(k) rollover check, deposit it into your IRA. Don’t endorse the check.

Step #5: Invest the cash

You can now invest your 401(k) rollover money how you wish. Consider diversifying your investments across different asset classes and sectors.

401(k) rollover options

If you’ve switched jobs There are 4 options for your old 401(k):

  1. 401(k) rollover into an IRA (focus of this article)
  2. Convert your 401(k) into a Roth IRA
  3. Leave your 401(k) in the old plan
  4. Transfer your 401(k) to your new job

This article has more on your 401(k) rollover options.

Rollover IRA vs traditional IRA

How is a rollover IRA different from a traditional IRA? They are the same. There are no differences in the type of account: a rollover IRA is a traditional IRA.

The only difference, which is slight, is a rollover IRA signifies an account that’s been funded with 401(k) retirement plan assets (or a 403(b) or another type of qualified retirement plan). You can have a rollover IRA that’s a combination of regular pre-tax IRA contributions and rollover assets. Just make sure you understand the asset protection implications explained earlier.

IRA rollover vs transfer vs Roth conversion

An IRA rollover is when you have an old 401(k) plan that you roll over into an IRA. The type of account changes from a 401(k) to an IRA.

An IRA transfer is when you move assets from one IRA to another IRA. The money is transferred between two IRAs of the same type.

A Roth conversion is when you take funds in a pre-tax account (like a 401(k) or IRA) and convert the money to an after-tax Roth IRA.

Other top questions about IRA rollovers:

  • Do you have to sell your positions? When open an IRA at another financial institution, yes, you’ll need to sell the funds. If you’re staying at the same custodian, you can ask if the plan and custodian will permit an in-kind distribution so you can take your shares when you roll over to an IRA. You could do an IRA transfer to another custodian afterwards, but this would be more paperwork and time.
  • How long do you have to do an IRA rollover? Typically, as long as your 401(k) is at least $5,000, the plan can’t kick you out unless it terminates. But don’t wait too long or you’ll never do it.
  • Is there a penalty? No, there are no penalties for 401(k) rollovers. There would be a penalty if you just took the money out, though. But that’s not an IRA rollover.
  • Are there taxes? If you don’t do a direct rollover, you’ll be subject to automatic withholding. We only recommend direct rollovers. There’s no reason not to do a direct rollover if you are doing a rollover.
  • Can you roll your 401(k) to an IRA while you’re still employed? No, you have to leave your job to roll money out of your 401(k) into an IRA. If your 401(k) allows loans, you could access funds that way while still working, but that’s typically a last resort for cash.
  • What if you have a 403(b)? The process is the same if you have a 403(b). You can still request a 403(b) rollover to an IRA the same way.

Questions about the rollover process? Darrow Wealth Management helps individuals navigate a job transition and develop a cohesive investment strategy for all their accounts. To learn more about Private Wealth Management Services, contact us today to schedule a consultation with an advisor.

Investing insights, delivered weekly.

What to Consider When Changing Jobs

Free Job Transition Guide

Download