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401k Rollovers: Can I Rollover a 401k to an IRA?

401(k) rollovers can be confusing, and kind of scary. You’re moving large sums of money from one account to another, and you’re doing everything you can to avoid messing up and landing a huge tax bill. I get it. In 2019, I did my very first, and hopefully only, 401(k) rollover! I learned a lot in the process, and I’m happy to share all that I learned from my experience. Let’s get to it!

Can I Rollover a 401k to an IRA?

The short answer is yes. I know because I did precisely that when I did a 401(k) rollover. Read more about my experience in my Betterment 401k rollover review! Of course, everyone has different situations, so it’s essential to understand some of the things that can go wrong.

Firstly, you need to determine where you want your 401k to be moved to or “rolled over.”

Between your current plan administrator and the new administrator, they should be able to answer all questions you might have before rolling over. But, which questions should you ask? Here are a few that I had, and what the answers provided to me were. Remember, always consult with a tax professional before undertaking any large financial transactions with potential tax consequences.

How Long Does a 401k Rollover Take?

It depends on the complexity. For example, I had a traditional 401k and a Roth 401k. This is called a “mixed rollover,” and it’s slightly more complicated than a traditional 401k to a traditional IRA or a Roth 401k to a Roth IRA. With that said, my rollover took two weeks to complete. I was partly responsible because I was asking lots of questions and exploring options, such as rolling everything into a single Roth IRA.

How Much Does a 401k Rollover Cost? Are There Any Fees for a 401k Rollover?

For the company you are rolling over to, there are generally no fees. I suppose there may be a company out there charging money, but I’ve never heard of it. After all, they stand to make money from managing your IRA! For the plan administrator that you’re leaving, they may have a fee. Betterment confirmed for me that there are plan administrators that charge fees for leaving.

Can I Rollover a Traditional 401K to a Roth IRA?

Yes, but it typically requires rolling over to a traditional IRA first, then converting the traditional IRA to a Roth IRA. Be sure that you consult with a tax professional because you will have to pay taxes on the conversion. Betterment confirmed this for me when I was in the process of my rollover. I wanted everything in the Roth IRA but decided to avoid the tax headaches for now.

Can I Rollover a Roth 401k to a Traditional IRA?

You first need to transfer to a Roth IRA, then convert the Roth IRA into a traditional IRA. You are likely to even receive a refund on the taxes you paid for contributing to your Roth 401k! Of course, there are only a few situations where a Roth to Traditional conversion makes sense, so make sure you consult with a financial professional before making the decision.

Can I Rollover a 401k From My Current Employer?

Generally, the answer is no. There are a few circumstances where a current employer may allow it for certain employees. However, generally speaking, you cannot rollover a 401k while still employed by the same company.

How Do I Rollover a 401k Without a Penalty?

The first thing to do is consult with the company you’re rolling over with, to determine how you can avoid tax penalties. There are many scenarios, so I can’t possibly cover them all. The primary reasons there might be a penalty or additional taxes are:

  • Converting from a traditional to a Roth.
  • If you have an outstanding loan on your current 401k that you won’t pay back, which may be considered an early withdrawal.
  • If your current plan administrator writes the checks out to you, rather than doing a direct rollover to your new plan administrator.

If a conversion is causing the penalty, then don’t do a conversion. If you have an outstanding loan, then pay it, or see if you can roll the loan over to the new administrator. Still, it would be best if you worked with both plan administrators and possibly a financial professional to see what options you have to avoid a penalty.

What is a Direct 401k Rollover?

A direct 401k rollover is when your 401k funds are transferred directly to another plan administrator with an equal tax treatment. This is the best way to avoid paying additional taxes and penalties.

What is an Indirect 401k Rollover?

An indirect rollover is when the retirement funds are deposited in a personal account. These funds must be deposited into a proper retirement account within 60 days to avoid taxes, fees, and penalties. If at all possible, avoid an indirect 401k rollover. If you have no choice, consult with a financial professional beforehand, so you avoid all fees and penalties.

What is a Roth 401k Rollover?

This is when you have a Roth 401k and need to roll it over from your previous employer. You fund a Roth 401k with after-tax dollars. Meaning you’ve already paid income tax on the money that you deposit into the account. The advantage of a Roth 401k is that you won’t pay taxes on the money you withdraw after retirement.

Where Should I Rollover My 401k?

This is a very personal question and depends on numerous factors. How close are you to retirement? What level of risk-aversion do you have? Are you fee sensitive? Do you prefer maximizing returns during upswings or minimizing losses during downturns? These are all questions you should ask yourself before you do your rollover.

For me, I decided on Betterment because I loved the diversity of investments they offered, I loved Betterment’s pricing, and they provided automated tax-loss harvesting and rebalancing. You can read my full Betterment review to learn more or my Betterment 401k rollover review to learn more about my experiences.

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