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401K Rollovers - A Quick Start Guide

Considering a 401K rollover?  Consider your options first

401K Rollovers

One of the many great things about a 401K retirement savings plan is that your assets are often portable when you leave a job. But what should you do with them? For many people, a great choice is to convert their 401K into an IRA.

If you have decided that an IRA is best for you, here is what you will need to do to start the process.. Initiating a rollover IRA shouldn’t take more than a few minutes, and once your funds are transferred, you’ll have access to a wider investment selection — and potentially lower fees. Plus, Research Financial Strategies can help you ever step of the way. From starting the rollover process to managing your account.

401K Rollover Dos & Donts

There is a right way to roll over your funds from a 401K and a wrong way. You don’t want the 401K provider to cut a check in your name, and you don’t want to cash out your balance. In both scenarios, you’re at risk of owing up to a third of your balance to the IRS.

If you’re leaving your job for a new employer, it’s important to address rolling over your 401K. The wrong decision could cost you.

Rolling over a 401K with a high expense ratio into a fee-free individual retirement arrangement (IRA) could save you a substantial amount of money. According to the Department of Labor, a 1 percent increase in fees could reduce your retirement account balance by 28 percent.

This choice is not the perfect one for everyone. But if it is the right fit for you, how do you get the money from your employer sponsored 401K to an IRA? It is called a 401K rollover.

How to start A 401K rollover

Take these four steps to roll over your funds without incurring any unpleasant tax surprises:

  1. Decide on a Roth or a Traditional IRA. If you roll into a Roth IRA, you’ll owe taxes on the rolled amount. If you want to roll over your funds without incurring taxes, stick with a traditional IRA. We can help you decide which is best for you.
  2. Ask your 401K plan for a “direct rollover.” These two words are important: They mean that the 401K plan will cut a check directly to your new IRA account, not to you personally. If not, you potentially will incur taxes and penalties.
  3. Choose your investments. The 401K funds will initially enter the IRA as cash. At that point, we will invest your account based on your long-term goals and tolerance for risk.

What is a 401K rollover?

A 401K rollover is when you direct the transfer of the money in your retirement account to a new plan or IRA. The IRS gives you 60 days from the date you receive an IRA or retirement plan distribution to roll it over to another plan or IRA. You’re allowed only one rollover per 12-month period.

Your 401K institution may send a paper check to you, to the institution where you are opening your IRA, or the money may be rolled over paperless via wire transfer.

You have 60 days from the date you receive your retirement plan distribution to get it deposited into a qualified account; otherwise, it will be a taxable event.

If taxes are withheld from the distribution, you’ll need to use other funds in order to rollover the full amount.

Beware 401K balance minimums

If your account balance is less than $5,000, your old employer may require you to move it. In this case, consider rolling it over to your new employer’s plan or to an IRA.

Always keep track of your hard-earned 401K money and make sure that it is invested or maintained in an account that makes sense for you.

If your previous 401K has a balance of less than $1,000, your employer has the option to cash out your accounts, according to FINRA.

Mutual Funds vs ETFs

Mutual Funds charge higher fees and yet their returns aren’t any better than ETFs.  If you have a $200,000 portfolio, just a 1% difference in fees compounded over 20 years at 7% will cost you over $87,000!

The Bottom Line

When you leave a job, either for a new one or just because you’re rethinking your life, one key task is deciding whether to transfer your 401K into another account. Neglecting this task could leave you with a trail of retirement accounts at different employers, or even nasty tax penalties should your past employer simply send you a check that you did not reinvest properly in time.

People in the workforce are much more transient today.  If you leave your 401K at each job, it gets really tough trying to accurately keep track of what is going on.  It’s much easier to consolidate into one 401K or into an IRA.

The key point to remember about all these rollovers is that each type has its rules. It’s important to be sure that you are in compliance so you can benefit from the tax advantages and not find yourself paying penalties. Of course, if a rollover is what you plan to do, you’ll need to open an IRA retirement account. We are here to help you every step of the way. Research Financial Strategies offers a no obligation consultation to help you with the first step towards your dream retirement.

Considering a 401K rollover?


Evaluate your options first.

Have questions? Send us an email.

Jim Streight James Streight Chief Marketing Officer