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401(k) Rollovers: A Quick Start Guide

Aug. 7, 2018
401(k), Investing, IRA, Roth IRA
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When you take a 401(k) from an old job, you have a few options on what to do with it. But for many people, a great choice is to convert the 401(k) into an IRA. (Aren’t sure? See our list of the pros and cons of rolling over your 401(k) to an IRA.)

If you’ve decided an IRA is right for you, here’s what you’ll need to do to make it happen. Initiating a rollover IRA shouldn’t take more than a few minutes, and once your funds are transferred, you’ll have access to a wider investment selection — and potentially lower fees.

» Confused by retirement account fees? Jump to our fee glossary and 401(k) fee calculator

How to start your rollover

There’s a right way to roll over your funds from a 401(k) and a wrong way. You don’t want the 401(k) provider to cut a check in your name, and you don’t want to cash out your balance. In both scenarios, you’re at risk of owing up to a third of your balance to the IRS.

Take these four steps to roll over your funds without incurring any unpleasant tax surprises:

  1. Decide on a Roth or a traditional IRA. If you roll into a Roth IRA, you’ll owe taxes on the rolled amount. If you want to roll over your funds without incurring taxes, stick with a traditional IRA.
  2. Open a rollover IRA account. Check out our detailed list of the best IRA accounts to find a provider that aligns with your needs, or simply see the next section for more context on this process.
  3. Ask your 401(k) plan for a “direct rollover.” These two words are important: They mean that the 401(k) plan will cut a check directly to your new IRA account, not to you personally.
  4. Choose your investments. The 401(k) funds will enter the IRA as cash, so you’ll need to invest the money. See the sections below on hands-off investing and active management.

How to choose your IRA provider

Finding the best account provider starts with knowing your investing style. Do you prefer to be hands-off with your investments or to actively manage them?

Options for hands-off investors

If you’re not interested in researching and choosing individual investments, you’ll need a provider to help you create a well-diversified portfolio that runs largely on its own. An automated investment management service, often called a robo-advisor, is a good option. Robo-advisors will build a personalized portfolio using low-cost funds based on your preferences, then regularly rebalance those funds over time to help you stay on track, all for a much lower fee than a conventional investment manager. Wealthfront, Betterment and Wealthsimple are three providers that shine in this category.

Broker

Highlights

Commissions

Account Minimum

Current Offers

Start Investing

Wealthfront

Wealthfront

Show Details

Free management on small balances; hands-off approach for IRA investors.

Commissions

0.25%

management fee

Current Offers

$5,000

amount of assets managed for free

on Wealthfront's secure website

Show Details

Betterment

Betterment

Show Details

Low-cost ETFs; automatic rebalancing; extensive advice

Commissions

0.25%

management fee

Current Offers

Up to 1 year

of free management with a qualifying deposit

on Betterment's secure website

Show Details

Wealthsimple

Wealthsimple

Show Details

Socially responsible investments; free tax-loss harvesting

Commissions

0.40%-0.50%

management fee

Current Offers

Up to $1,000

cash bonus with a qualifying deposit

on Wealthsimple's secure website

Show Details

Options for active management

If you want to build and manage your portfolio, you’ll want an online broker where you’ll be free to buy and sell a variety of low-cost investments. TD Ameritrade stands out in mutual fund selection with access to over 4,000 no-transaction-fee mutual funds, while Merrill Edge and its $0 account minimum are great for younger or low-balance savers.

Broker

Highlights

Commissions

Account Minimum

Current Offers

Start Investing

Merrill Edge

Merrill Edge

Show Details

Breadth of research; low commissions; customer service

Commissions

$6.95

per trade

Current Offers

$100-$600

in cash bonus with a qualifying deposit

on Merrill Edge's secure website

Show Details

Etrade

Etrade

Show Details

Large number of no-trading-fee mutual funds; extensive research

Commissions

$6.95

per trade

Current Offers

Up to $600

in cash bonus with a qualifying deposit

on Etrade's secure website

Show Details

One thing to keep in mind: If you go with a traditional DIY broker, your choice of provider won’t be the biggest driver of a portfolio’s growth — the investments you choose will determine that. See our guide on investing in your IRA for more details.

» Ready to compare companies? We’ve spent over 300 hours researching the best IRA providers. Browse our analysis of the best IRA providers to find one that’s right for you.

Retirement account fees: Your cheat sheet

When comparing costs between your old 401(k) and various IRA providers, it helps to know the most common types of retirement account fees. Here’s a glossary to help, and some things to watch for with each type of fee.

Trading commissions. These costs come when you buy or sell a stock or exchange-traded fund. You typically won’t find trade commissions in 401(k) plans, but you could encounter them in an IRA. Many brokers have a list of commission-free ETFs, so you can avoid commissions by skipping individual stocks and choosing from that list, or by investing in index funds or mutual funds.

Management fees. These costs, which are assessed as an annual percentage of your portfolio balance, apply when an investment manager or robo-advisor is selecting the investments in your account. Investment managers commonly charge 1% or more, whereas robo-advisors typically charge between 0.25% and 0.89%. You pay this fee only if you opt to have your portfolio managed by one of these services.

Mutual fund transaction fees/sales loads. These sales charges can be completely avoided by choosing the right funds — look for funds that say “no-transaction fee” or “no-load.” You’re most likely to see this charge in an IRA or brokerage account; most mutual funds waive loads for 401(k) participants.

Expense ratios. These annual fees are charged by mutual funds — including index funds and ETFs — and represent a percentage of the amount you have invested in the fund. Many 401(k) plans offer low-cost funds, but investors can access a larger fund selection through an IRA, which may bring costs down even further. Generally be wary of funds with an expense ratio of more than 0.50% — there may be cheaper alternatives — and steer clear of virtually any fund with an expense ratio of more than 1%.

Administrative fees. These 401(k) fees cover the cost of running the plan, and are charged by the plan provider as either a flat fee or a percentage of assets. Some employers eat this cost, but many pass it on to plan participants.