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  • W. Scott Hurt, CFP, CPA

How To Rollover Your 401(k) To An IRA


How to Rollover Your 401(k) to an IRA

Leaving your current employer requires much more than putting in your two weeks, packing up your desk, and having a parting happy hour with peers.


You need to decide what to do with your 401(k)—leave it be, consolidate it with your new employer's plan, cash it out, or roll it over to an IRA.

While all of these options have their merits, rolling over your 401(k) from your former employer to an IRA can offer investors more flexibility, customization, and room for growth.


Download Free Cheat Sheet: Should I Rollover My Old 401(k)?

Knowing how to rollover your 401 (k) to an IRA is just part of the puzzle. You'll also need to know the pros and cons of doing it in the first place.


Here's how to rollover your 401 (k) to an IRA and many of the considerations you should think about before making it happen.

Top Benefits of a 401(k) to IRA Rollover


There are some potential advantages to rolling over your 401(k) into an IRA account.


General Rollover IRA Benefits

For starters, it can make your financial life simpler to manage.


Having fewer accounts from consolidating old 401(k)s makes investment management more straightforward and helps streamline your withdrawal management in retirement—fewer accounts, fewer required minimum distributions (RMDs).

Many IRAs provide far greater investment options than a typical 401(k) plan, giving you the ability to craft a well-diversified portfolio tailored to your needs.


You can invest in nearly anything under the sun, from stocks and bonds to index mutual funds and ETFs, REITs, commodities, and more.


These investment options offer more freedom for customized asset allocation for your risk tolerance and financial goals.


Doing so can also be a nice catalyst to your retirement savings.


Technical Rollover IRA Benefits

Rollovers provide more technical benefits as well.

Unless you have an exceptionally good 401(k), it’s entirely possible that you can lower your account fees by rolling over funds to an IRA. Investment fees are the antithesis of returns, so this particular benefit can make a substantial difference.

However, fees aren’t everything in this decision. It can make sense to roll your 401(k) over even if the IRA fees are higher than your 401(k).


Why?


Perhaps the investment choices provides greater financial opportunities.

Having an IRA can also make it much easier to manage Roth conversions. With both a traditional and Roth IRA at the same custodian, it’s straightforward to accomplish.

Housing IRAs at the same custodian also opens the door to implement an asset location strategy along with your Roth conversions.

An example could be placing your income-generating assets in the traditional IRA, where they would be taxed at regular income tax rates anyway, and your high-growth assets like stocks in the Roth IRA, to grow tax-free.

IRAs also give you a significant charitable benefit over 401(k)s.


The IRS allows you to make a Qualified Charitable Distribution of up to $100,000 tax-free from your IRA to donate to a qualified charity.


A QCD can even count as your annual RMD. That benefit doesn’t exist for 401(k)s.

Finally, having an IRA may make it easier to consult with a professional advisor and allow them to manage your account per your financial plan. It can be difficult—sometimes impossible—to defer management to an independent advisor with a 401(k).

Should You Invest In a Traditional or Roth IRA?


Not all Individual Retirement Accounts are created equal—so which should you choose?

As with most financial questions, there isn’t a universal answer.


It depends on several factors unique to you. This free checklist can help you figure out if a Traditional IRA or a Roth IRA is best for you.


But, we will address the key differences below.


The Case For a Rollover to a Traditional IRA


Perhaps the best part about investing in a traditional IRA is that you can rollover your 401(k) without incurring a tax penalty.

Traditional IRAs and 401(k)s are both tax-deferred accounts, meaning they are funded with pre-tax dollars. If you’ve already paid taxes on your 401(k) contributions, you won’t have to pay them again when you roll them over to a traditional IRA.

If you plan to make additional contributions to the IRA, a traditional IRA allows you to deduct them up to certain income limits.

You will need to take required minimum distributions once you turn 72 and will owe ordinary income tax on any distributions you take.

Why Consider Investing in a Roth IRA


The most significant benefit of a Roth IRA is obvious: tax-free money in retirement.

However, be mindful of any status difference between your 401(k) and Roth IRA. Unless you roll over a Roth 401(k), you'll need to pay taxes on the rollover, which could be costly.

Knowing how to reduce taxes in retirement, both in the short and long-term, is critical to making this decision.


Splitting The Difference


You could also split your rollover between a Roth and a traditional IRA. The right choice for you is all about managing your tax rate, both now and in the future.


If you're in a lower tax bracket now and anticipate being in a higher one later, prioritizing Roth dollars could go a long way.

You can also switch later if your situation changes. If a traditional IRA makes the most sense to start, you can do a Roth conversion—converting traditional IRA funds to Roth IRA—later.


Keep in mind that IRAs carry much smaller contribution limits than 401(k)s.


You can contribute $6,000 with an extra $1,000 in catch-up contributions to your IRA in 2021.


While a rollover can bypass these limits, it's worth noting that your monthly contributions to an IRA will be lower.

Step by Step Guide To Rollover Your 401(k) to an IRA


If you’ve decided that rolling your 401(k) into an IRA is the right decision, here is a step-by-step guide to getting you through the rollover process.

Start by researching and selecting a new IRA custodian.

There are several choices, and it can seem overwhelming. The main things to look for in a new financial institution are,


  • Robust investment selection,

  • Low fees, and

  • User-friendly applications.

We use both Charles Schwab and Fidelity with our clients and have been very happy with Fidelity’s service. They also have an easy-to-understand interface for seeing all of your balances and positions.

Once you have picked a custodian follow these steps:


  1. Open an account with your new custodian. You’ll be prompted during the process to identify how you are funding the account, so make sure to select the rollover option.

  2. Contact your 401(k) plan administrator to initiate the rollover. Each firm has its own process, and you may be prompted to complete a few additional documents at this stage.

  3. Deposit money into the new account. The rollover may happen from custodian to custodian if you choose the direct rollover option. If you do an indirect rollover, the 401(k) provider could send you a check that you then have to deposit in the new account. A direct transfer is usually the better and simpler option.

  4. Start investing!

On the surface, rolling over your 401(k) can seem easy. Unfortunately, there are a lot of "small" details that can cost you a lot of money if overlooked.


If you want expert help, just contact us for help.


Key Issues to Consider for Your 401(k) Rollover

If you are thinking about rolling your 401(k) into an IRA, here are some additional points to consider.


While these situations may not apply to you, it’s worth double-checking as the impact could be enormous.


  • Before you initiate the rollover, identify any pre-tax or after-tax amounts in your 401(k). You’ll want to direct those to the appropriate account, whether it's a Roth or traditional. This is a significant point, and a qualified financial advisor such as Covenant Wealth Advisors can assist with sorting this information out and the mechanics of the rollover. It's also critical to seek out your tax advisor.

  • If you plan to retire before 59 ½, be aware that some employers allow pre- 59 ½ withdrawals from the company retirement plan without an IRS early withdrawal penalty. An IRA does not allow this, so it may make sense to wait until you turn 59 ½ to initiate the rollover.

  • If you hold company stock in your 401(k), make sure to consider any potential net unrealized appreciation (NUA). This can have HUGE tax implications and should be prioritized over a rollover. We would be happy to discuss this with you if you think it may apply.

You have several decisions to make when you change jobs, managing your investments with your previous employer is one of them.


While your new job may boast a lucrative retirement plan, it's worth evaluating whether or not an IRA rollover is the right move for you.

Our advisors at Covenant Wealth want to help you maximize your entire investment strategy.


For you, that might mean a 401(k) to IRA rollover.


Since everyone’s situation is different, set up a call with our team to see if a rollover could be an advantageous strategy for you.


We offer a free, no-obligation consultation to individuals age 50 plus who have over $1 million in investment assets.

 

Scott is a Wealth Manager for Covenant Wealth Advisors and is a CERTIFIED FINANCIAL PLANNER™ (CFP©) practitioner and a Certified Public Accountant (CPA).


Scott has over 16 years of experience in the financial services industry and specializes in helping individuals age 50 plus with over $1 million in investment assets.

 

Disclosures:


Covenant Wealth Advisors is a registered investment advisor with offices in Richmond and Williamsburg, VA. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital.

The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place.

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