How to Use a 401K Rollover to Move Your 401K

When you leave your job to work with a company, you may be wondering what to do with your 401K. It would be easier if you could bring it with you to the new company, but that isn’t possible. However, you can do a 401K rollover.

The reason you would want to do a rollover is you’ll have cheaper account fees and it will offer diversity to your portfolio. Rollovers can go into an IRA or 401K, but both must be opened with the funds from your rollover.

The benefits of a 401K rollover into an IRA will depend on which type of IRA you choose. Your taxes will be deferred if you use a traditional IRA. You would owe taxes on doing a rollover into a Roth IRA unless you had a Roth 401K.

Another benefit of a rollover is you’ll save money. If you decide on leaving your 401K where it is, with the ex-employer, they’re likely to charge you more than they would current employees.

But there also could be benefits to leaving your 401K with your ex-employer. If you leave your 401K where it is, with your old company, then it remains protected from creditors. You can also use it as collateral if you need to acquire a loan from the bank.

You can open an IRA account with an online broker or a robo-advisor. If you choose an online broker, you’ll manage your account yourself. The benefit is you won’t have monthly account fees.

If you choose a robo-advisor, then your investments are personalized and chosen based on your preferences. Over the long term, they are managed for you as well. Because the robo-advisor is an automated advisor, the account fees are fairly minimal.

Once you open your IRA account, you can contact your plan’s administrator at your old job and ask the administrator to deposit the funds directly into your new account. This is called a direct rollover. You definitely do not want to cash out your 401K because then you’ll be faced with taxes and penalties for early withdrawal.

When your money has been deposited, if you chose an online broker, then you can begin the process of choosing your investments. Be sure you diversify your investments. You should have a mix of mutual funds if you want long-term results.

Understand the process of a 401K rollover can save you from making mistakes that impact your retirement. Depending on your situation, a rollover could be beneficial to your future plans.