How To Roll Over Your 401(k) To An IRA (And Why It’s Important)

how to roll over your 401(k)


Whenever you change jobs, whether it’s because you were laid off or found a new gig, there’s one important financial detail you don’t want to forget about: your 401(k). If you’re lucky enough to have an employer-sponsored retirement account like a 401(k) or 403(b), it’s important to make sure that money is still growing even when your job’s in flux.

The only way to do that is by rolling it over into an individual retirement account, AKA an IRA, or into your new employer-sponsored retirement account. There are benefits to both, but negatives to leaving the money sitting in the old account. Here’s why it’s important to know how to roll over your 401(k).

Your retirement account is an investment account.

When you stash pre- or post-tax money into a retirement account, that cash doesn’t just sit and chill. It grows month over month due to your contributions, but it’s also invested with the potential to grow in value over time. However, when your employment ends with a company, you’re no longer able to contribute to that specific account, which means the money won’t grow because of your contributions.

It still has the chance to grow, but only because of the portfolio in which it’s being invested. The thing is, though, that you can’t control that portfolio anymore when you leave that company. The only way you’d be able to control it is if you roll over the money into an IRA or to your new company-sponsored retirement account.

How To Roll Over Your 401(k) Or 403(b)

401(k) rollover process

Step 1: Decide where you’re moving that money. If you decide that you want more control over your retirement funds, then you want to roll over your money into a new account. If your new employer doesn’t offer you a retirement account, or you’re not working for a company, the first thing you want to do is find a fiduciary that’s right for you. A fiduciary is a company or person that has your best interest in mind at all times, so you can be sure your money is in the right hands. For example, Ellevest is an online financial firm that is a fiduciary and also works to empower women as both investors and business owners.

Step 2: Open an account. Once you’ve found the right company, open an account so you can begin the rollover process. If you’re doing it online, you should be able to select “roll over” as the form of funding for the account. If you’re doing it in person with an advisor, you need to let them know that you want to roll over your old retirement account to this new one.

Step 3: Let your old company know ASAP. Call your old company and request that the funds are sent to the new company. You might be able to do it online, but sometimes talking directly to someone is easier. Either way, you need the name of the new company, the address, the new account number and the type of account you’re rolling the money into (traditional IRA or Roth IRA).

rolling over a 401(k)
Pexels/Bruce Mars

Step 4: Know the difference between accounts. If you roll your money over into a traditional IRA, you won’t have to pay any taxes on the total amount right now. If you roll it into a Roth IRA, then you have to pay taxes on it before you can start investing it again. A Roth IRA is a retirement account where you pay taxes upfront on the money so that you don’t have to later. It’s only available to people below a certain income, but if you qualify it might be smart to open a Roth IRA while you can to save money later on in life.

Step 5: Be sure the money is sent directly to the new company. Whatever account you choose, make sure you tell your old retirement account company that you want the money rolled directly over to the new account. This is important because if the company cuts a check to you personally, you definitely need to pay taxes on it (unless it was a Roth retirement account and you already paid taxes on it). Rolling it directly to the new company keeps the balance the same, which helps you start investing again right where you left off.

Step 6: Start investing again. Once you’ve rolled the money over to the new account — which can take a few days — choose how it’s invested. It sits in cash in that account until you select the type of portfolio you want. Most robo-advisors (online systems) offer you a few pre-selected options based on how aggressively you want to invest the money. If you’re not sure, schedule a call with your new financial advisor at the company and discuss what works best for your retirement goals.

Why All Of This Matters

Once you have your money in an IRA (Roth or traditional) and it’s being invested, you’re able to make contributions to it again to help it grow even faster. Although these won’t be pre-tax contributions from your paycheck directly to a retirement account, you’ll still be doing yourself a solid by saving for retirement. Every year before Tax Day in April, you can contribute a certain amount of money to your IRA, so consider building these contributions into your budget so you can maximize your account.

At the end of the day, saving for retirement starts now, and you don’t want to miss out on one penny that could be saved for later in life. Streamline your accounts and stay in control of your finances so you can thrive in every aspect of your life.

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