How to Rollover 401(k) To IRA

Written by True Tamplin, BSc, CEPF® | Reviewed by Editorial Team

Updated on January 04, 2023

Research the different IRAs available: IRA fees and investment options vary widely, so it is important to do your research before choosing where you will open up an IRA.

Choose an IRA provider: Once you have decided on the type of IRA that works best for you, it's time to pick a financial institution to hold the account Banks, credit unions, custodians, and brokers are among the most common IRA providers, and they each have their benefits and drawbacks, so you'll need to do more research on those as well.

Contact the company where you have your IRA or Roth IRA: You will need to contact the company where you have your account and let them know that you'd like to roll over your 401(k) into this new IRA.  The process varies depending on the financial institution's policies, but it could take a few weeks or up to two months for everything to complete.

Connect your accounts: Once they have your 401(k) information from your employer, the financial institution will be able to link the two accounts so that you can start taking advantage of a whole new set of investment options.

Difference Between a 401(k) and an IRA

A 401(k) is an employer-sponsored retirement account. It's a tax-deferred plan that you fund with pre-tax income. That means you don't have to pay taxes on the money being saved for your retirement until you withdraw it during retirement.

An IRA, or individual retirement account, is also a type of tax-deferred plan, but it can be set up at any US financial institution--not just through your employer--and the types of investments are more diverse.  You can have a traditional IRA or Roth IRA, or both.

The big difference is how the IRS taxes withdrawals from your account. With a Roth IRA, you don't pay any taxes on withdrawals, whereas you do with a traditional IRA.

You are likely to choose one over the other based on how much money you earn and whether or not you want to pay taxes on your investment earnings every year. 

For example, since you don't have to pay taxes upfront with a traditional IRA, it's generally best for people who know they'll be in a higher tax bracket come retirement than they are now. 

For someone who knows he or she won't be pulling out large sums of money--for example, someone who is just starting in the working world--a Roth IRA can be a better choice since you are taxed upfront.

Tax Implications of Rolling Over Your 401(k) to an IRA Account 

If you are considering rolling over your 401(k) to an IRA account, you need to know about the tax implications. 

The IRS considers IRAs as retirement accounts, and they will expect you to take withdrawals at some point. 

With a traditional IRA, you will have to pay taxes on the withdrawal, whereas, with a Roth IRA, there is no up-front taxation which could be advantageous if it's likely that you'll be in a higher tax bracket come retirement than you are now.

The difference between a 401(k) and an IRA is that with the 401(k), you are restricted by contribution limits because it is an employer-sponsored plan. 

With an IRA, you are not only able to contribute more, but you can also choose from a wider range of investments because it is your account. 

Your financial institution will require you to jump through some hoops if you want to roll over your 401(k) into an IRA, but the result could be a more diversified and less restrictive investment portfolio that can better secure your future.

Pros and Cons of Rolling Over Your 401 (K) To an IRA Account

The following pros and cons of rolling over your 401(k) to an IRA account may help you decide:

Pros:

  • You can contribute more to your IRA than a 401(k) since there are no contribution limits.
  • The IRA offers a wider range of investments than a 401(k).

Cons:

  • The process of rolling over your 401(k) can be lengthy.
  • There is an extra layer of fees, so you'll need to keep track of whether or not they are worth it.

Final Thoughts

If you're considering rolling over your 401(k) to an IRA account, you must understand the tax implications and pros and cons of doing so. 

The IRS considers IRAs as retirement accounts, and they will expect you to take withdrawals at some point with a traditional IRA. 

In contrast, there is no up-front taxation which could be advantageous if it's likely that you'll be in a higher tax bracket come retirement than when currently working. 

However, there are fewer restrictions on contributions with a Roth IRA because employers typically set contribution limits for 401(k)s. 

Your financial institution may require you to jump through hoops to roll over your 401(k), but the result could be a more diversified investment portfolio providing security for future needs.

 

How to Rollover 401(k) To IRA FAQs

How often do I need to rollover my 401k to an IRA once the account is set up?

That largely depends on what your future needs are. If you're retiring soon with a hefty pension, then it's likely that you won't need to touch the funds again until you need them for retirement purposes. On the other hand, if you plan to continue working for several years yet, it may be wise to move the funds around every couple of months to avoid any penalties levied against your account.

Should I roll my 401k into an IRA or my Roth IRA?

There are advantages and disadvantages to both types of IRAs. With a traditional IRA, you will have to pay taxes on the withdrawal, whereas with a Roth IRA, there is no up-front taxation which could be advantageous if it's likely that you'll be in a higher tax bracket come retirement than you are now. The difference between a 401(k) and an IRA is that with the 401(k) you are restricted by contribution limits because it is an employer-sponsored plan. With an IRA, you are not only able to contribute more, but you can also choose from a wider range of investments because it is your account. Your financial institution will require you to jump through some hoops to roll over your 401(k) into an IRA, but the result could be a more diversified and less restrictive investment portfolio that can better secure your future.

How does a 401k rollover help me?

There are several benefits to rolling over a 401(k) into an IRA. For starters, you can contribute more to your IRA than a 401(k) since there are no contribution limits on IRAs. Additionally, the IRA offers a wider range of investments than a 401(k): you are not limited to your former employer's choices. You can rollover a 401(k) into an IRA at any time, but you should do so before the account holder's 59 ½ birthday for tax purposes.

What happens if I don't rollover my 401k to an IRA?

You could end up paying a lot of taxes and penalties if you do not roll over your 401(k) into an IRA account. The IRS considers IRAs as retirement accounts, so they will expect you to take withdrawals at some point with a traditional IRA. In contrast, there is no up-front taxation which could be advantageous if it's likely that you'll be in a higher tax bracket come retirement than when currently working. However, with a Roth IRA, there are less restrictions on contributions because employers typically set contribution limits for 401(k)s.

Can I use my 401k money to fund a Roth IRA?

Yes, you can make an in-service withdrawal from your 401(k) and contribute the funds to a Roth IRA. This will allow you to participate in the tax benefits of a Roth IRA and add to your retirement savings even faster. However, when you do this, the amount you contribute will count towards your deductible contribution for the year.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.

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