How To Rollover 401K Funds into an IRA

Invest wisely in your retirement and avoid adverse taxes

Rolling your 401K plans into an IRA is one of the smartest things you can do with a retirement plan. The cleverest thing, of course, is being astute enough to sign up for your company's 401K plan. Now it's time for a little advice. You were smart, and signed up for a 401K, however, you are now leaving the company, and therefore, your job. To avoid paying the taxes you would incur by cashing out your retirement money, you want to rollover your 401K into an IRA.

You can accomplish that by following these steps:

  1. Choose a bank, brokerage firm or mutual fund company. The financial institution you choose will give you a form that authorizes a direct rollover once you open the account. Do not forget to fill out the form authorizing your rollover. When you open an account, be aware that all financial institutions (banks, brokerages and mutual funds) must comply with the U.S. Patriot Act. This means you will be asked for your name, address, date of birth and other information to verify who you are.
  2. Read your 401K plan literature to determine if it charges a fee for either selling funds in your account or for an outgoing account transfer. It's important to understand your 401K rules before going any further. If it charges a fee for an outgoing account transfer, ask your new IRA custodian if they will pay that fee for you.
  3. You may be able to transfer existing mutual funds in your 401K to an IRA at a brokerage firm. But in order for this to occur, both the brokerage and 401K must allow it. Be aware that a lot of brokerage funds only accept cash. Call your old 401K plan as well as your new IRA custodian to inquire if this is permissible. If it is not allowed, your mutual funds must be liquidated.
  4. Make sure the check from your 401K is deposited in your chosen bank, brokerage or mutual fund IRA within 60 days of the date it is sent out. Call your IRA custodian to make sure your funds have arrived. Although it is rare, 401K funds can sometimes be sent to the wrong account or wrong location.

Once your 401K has been rolled over into an IRA, you can breathe a sigh of relief. You have made a great decision to make this transfer rather than pay the taxes required on a withdrawal. The money in your IRA will grow tax free until your retirement, and hopefully provide you with the additional funds needed for when you stop working. Now you know how to make a great retirement investment!


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