When people start a new job, often the primary focus goes toward acclimating to the new role and company. One important aspect to be aware of when starting a new job is what to do with your old 401(k) from a previous job. In some cases, it makes financial sense to roll your old 401(k) account into an Individual Roth Account (IRA), which can help you continue to earn interest on your deposits and build up savings for retirement.
In this guide, we explain what 401(k) rollovers entail, how to transfer a 401(k) to an IRA, and what types of benefits you can gain from taking this strategic financial action.
What Is A 401(K) Rollover?
If you had a 401(k) retirement account with your previous employer, those funds will continue to stay with that retirement account provider and will continue to be subject to the same fees and terms, even when you’re working somewhere new. With a 401(k) rollover, you transfer your old 401(k) account to a new retirement savings account. This can either be through a new 401(k) account with your current employer, or into a different retirement savings account altogether, such as an IRA.
Rolling over a 401(k) gives you more control over your money. You may find it easier to manage it all in one place, or you could save considerably on fees by rolling it over. You’re not locked into leaving your 401(k) with your previous employer’s account. Consider your options and what makes most financial sense for you.
Steps To Rolling Over 401(K) To An IRA
It’s simple to roll over a 401(k) to an IRA. You can complete the process for rolling over a 401(k) to an IRA online and over the phone, as long as you have the right information available. Follow these steps:
1. Choose the IRA plan
In this step, you’ll want to choose both the IRA provider and the IRA plan. There are different types of IRAs. A traditional IRA provides immediate tax-deductibility benefits as contributions grow tax-deferred. After the age of 59½, withdrawals will be taxed as current income.
A Roth IRA offers no current-year tax benefits, but contributions grow tax-free. Withdrawals are also tax-free after five years and after age 59½.
Look at your old 401(k) plan to see which type of assets you have. If you’re moving over pre-tax assets, you’ll choose a traditional IRA, or a rollover IRA if the provider offers that. If you’re rolling over after-tax assets, you’ll choose a Roth IRA. If you have both types, you’ll need two types of IRAs to move the funds into.
You may already have an IRA plan that works for the rollover, or you may need to open a new IRA account. You can also convert a traditional IRA to a Roth IRA, if that’s the type of IRA you prefer. If you do that, you’ll just need to be aware that you’ll have to pay taxes on the money you transfer now, but know that it will grow tax-free.
To choose a provider, you can contact IRA providers to ask about their management systems, investment options, and fees. Once you’ve selected an IRA provider and the type of plan you want to open, you can move on to the next step.
2. Open a new IRA account, if needed
If you don’t yet have an IRA account to roll over 401(k) funds into, you’ll need to open that with your new financial institution. Follow the instructions with your new provider to open an account.
Once you have your desired IRA account open, you can move on to the next step.
3. Contact your 401(k)’s financial institution
To commence the rollover, you’ll need to contact the financial institution that holds your current 401(k). Ask them what type of information they need to complete a rollover of your 401(k) account to your new IRA financial institution.
Sometimes, the 401(k) financial institution may require a “letter of acceptance” to complete the rollover. If that’s the case, enquire with your new financial institution about how to procure one.
Keep in mind that if you’re still contributing to an old 401(k) plan, you likely won’t be able to roll it over until you stop contributions. You’ll want to complete that step before you roll over your 401(k).
4. Ask the old financial institution to roll over 401(k) funds
Once you’ve collected all the information you need and have an IRA account to distribute funds into, contact your old financial institution to initiate the process. Your new financial institution may be able to work on your behalf to help facilitate the rollover. It helps to talk to both parties to understand what you need and what the exact process entails, since it can differ among financial institutions.
The rollover process typically takes a few weeks to a month to complete. Sometimes, the previous financial institution will directly transfer funds to your IRA account, which is known as a direct rollover. In some cases, you may receive a check for the funds from your closed 401(k) account, known as an indirect rollover.
If an indirect rollover happens, ask your new financial institution how to proceed. You may be able to deposit the check online or mail it to the IRA provider. You typically need to send checks to the new financial institution within 60 days to avoid taxes and/or penalties.
Benefits Of Rolling Over A 401(K) To An IRA
If you’ve changed jobs, it’s important to consider what to do with your old 401(k) sooner than later to avoid penalties. Some of the reasons why you might benefit from rolling over a 401(k) to an IRA include the following:
- More investment choices: IRAs typically offer more investment options than 401(k) plans, including stocks, bonds, certificates of deposit (CDs), mutual funds, annuities, exchange-traded funds (ETFs), and real estate investment trusts (REITs). If you want more control over where you invest your money, an IRA account could offer that.
- Potentially lower fees: You might also be able to save money by rolling over a 401(k) account into an IRA account by decreasing the amount of fees you owe. Compare the fees you’re paying on an old 401(k) with the fees charged on an IRA to calculate potential savings.
- Simplified money management: If you’re looking for convenience, rolling over a 401(k) from a previous employer makes sense since you can manage your investments in a single IRA account. Rolling over a 401(k) from a previous employer can also help you move on from that employer and any ties you have to it.
When you roll over a 401(k) to an IRA, you have the potential to save money, increase your earnings with different investments, and simplify your money management. Research your options to see if it makes sense for you.
Ready To Roll Over? Start Your IRA Journey Now
Rolling over a 401(k) to an IRA takes some effort, but the payoff can be substantial. In terms of both investment growth and peace of mind, you may determine that an IRA makes more sense for your financial goals.
If you want to move over a 401(k) to an IRA, Arizona Central Credit Union can help. We offer traditional and Roth IRAs and can help with the IRA rollover process. To learn more, call toll-free at (866) 264-6421, or contact us online.
