What Happens When You Roll a 401(k) Into an IRA?

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You might get a lot more control over your money. 

Many people use employer-sponsored 401(k) plans to save for retirement. Doing so often means getting an employer match that makes it easier to build savings.

But you might reach the point where you’re leaving your job, or where you’re being forced to leave due to circumstances outside your control. At that point, you may have the option to leave your money in your old 401(k). But that may not be an optimal move.

In that situation, you could instead roll your old 401(k) into a new one if you’ve gotten a different job and your new employer has its own retirement plan. But if you don’t have access to a new 401(k) plan, you could always open an IRA account and do a rollover into it.

That said, there are rules you’ll need to follow if you want to go this route. And failing to stick to them could result in penalties.

The upside of rolling your 401(k) into an IRA

While many 401(k) plans will allow you to stay invested in a former employer’s plan, a better bet may be to move your money into an IRA. That way, you’ll have all of your savings in one place, and you may have an easier time keeping track of your money.

Plus, IRAs tend to offer a wider range of investment choices than 401(k)s. With a 401(k) plan, you’re generally limited to a few dozen funds, some of which might come with expensive fees that eat away at your returns over time. IRAs, on the other hand, allow you to invest your retirement savings in individual stocks. That could make it easier to build a portfolio that lends to achieving your financial goals.

How to roll your 401(k) into an IRA

When it comes to moving 401(k) funds into an IRA, there are two choices: direct rollovers and indirect rollovers. With the former, your money simply moves from your old 401(k) into your IRA without you having to act as the middle person.

If you don’t do a direct rollover, either because that option isn’t available or because you choose not to, then what’ll happen is that you’ll get a check for your 401(k) plan balance. But it will then be on you to get that money into your IRA within 60 days.

If you don’t make that transfer within 60 days, you risk having the check you receive for your 401(k) funds treated as a distribution from your savings. And if you’re under the age of 59 1/2, that will result in a 10% penalty on the sum you’ve moved over. So if your old 401(k) balance is $20,000 and you don’t roll it over in time, you’ll lose $2,000 as a penalty.

Another issue is that if your 401(k) check is considered a distribution, you’ll face taxes on it. And that could result in you losing an even larger chunk of money. So if you’re going to move your 401(k) into an IRA, aim for a direct rollover. And if not, mark that 60-day deadline on your calendar so you don’t miss it.

It’s important to keep tabs on your retirement savings, manage your investments, and track your progress. Rolling an old 401(k) into an IRA should allow you to do all of these things — and potentially set the stage for the financially secure retirement you’re after.

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