Best Options For Your 401k Rollover

401k RolloverWhen you leave your job, do you really want to leave your retirement savings behind?  It’s probably not the best idea.  So why not bring it with you.  There are several 401k rollover options available that allow you to take your retirement savings so you have better control of that money.

The 401k rules give you three options when you leave an employer.  You can cash it all out and pay the taxes and penalties – a terrible choice.  You can leave it sit and keep track of the plan administrator till you retire.  Or you can choose to rollover a 401k into another retirement plan.

Let’s focus on the rollover since it’s the best choice.  You have several 401k rollover options to choose from when you leave your old employer.  By doing so you keep greater control over your retirement funds.

Rollover To New 401k

If your new employer has a 401k plan, rolling over your old 401k into your new plan is the first choice.  Your money will continue to grow tax-free and you won’t be taxed for the rollover.  However, there are a few things to consider before you head down this road.

How high are the 401k fees for your new employers plan?  It may not sound like a big deal, but fees eat into your savings.  The higher the fees the worse it is.  Which is why most people are better off choosing the next option.

The second thing to consider is the investment choices the new 401k offers.  Lets face it, not every employer has a great 401k plan.  Some have plans that offer a range of investment options and others barely cut it.  Maybe you’d rather have your money in stocks and bonds, or a fund family that isn’t offered by your current plan.  If this is the case, then rolling your 401k into an IRA is a better choice.

401K Rollover To Traditional IRA

A traditional IRA is the most common choice if you want to have complete control of your retirement savings.  Just like the last choice, your money gets the tax advantages of an IRA and you don’t get taxed for the roller either.

In fact, you won’t find anything cheaper from a cost perspective.  An IRA offers you more investment options than a typical 401k plan. This gives you more control and flexibility when looking for specific investment vehicles while keeping costs low.

The best way to do an IRA rollover is with a direct rollover or trustee-to-trustee transfer.  There is no tax withholding, no taxes and no penalties.  Just make sure you have an existing IRA before hand.  If you don’t, open a no fee IRA with a broker that will help make a direct rollover as smooth as possible. Two of the best are:

  • TD Ameritrade – you can set up a no fee IRA in 15 minutes. Plus, it’s my broker because it offers one of the biggest selections of commission free ETFs to build a retirement portfolio. It’s a great way to keep your costs low while saving for retirement. Read the TD Ameritrade review to find out more.
  • E*Trade – offers a no fee IRA with step by step guidance in the set up process. It has a wide selection of no load mutual funds and commission free ETFs to your portfolio. You can have an account set up and rolling in few minutes.

401K To Roth IRA Conversion

The less conventional choice is a Roth IRA conversion.  In order to rollover to a Roth IRA, you’ll have to pay taxes on the 401k funds.  It’s not the most common choice because of the tax consequences involved.  But under certain circumstances may offer a better option than a traditional IRA.

There are two requirements when considering a rollover to a Roth IRA.  The first, you should be in a low tax bracket.  Any taxes paid will be at your current marginal tax rate.  So only those in the lowest tax bracket should even consider a Roth IRA conversion.

If you meet the first requirement, the money needed to pay the taxes should not come from the 401k.  There is a 10% penalty applied to any early withdrawals.  So you get taxed on the full amount first and then hit with a penalty for any withdrawals to pay the tax. Which seems like a waste.

Which brings us to the second requirement, having the money available to pay the taxes and still be financially secure.  A rollover to a Roth IRA is for a unique situation, but can help give some tax-free income during those retirement years.

Roth 401K to Roth IRA Rollover

Of course, if you have a Roth 401k and you took advantage of a it, this rollover would be easy. There’s no tax consequences for a Roth 401k to a Roth IRA rollover, just make sure you have an existing Roth IRA set up before hand and follow it up with the direct rollover.


The times of spending an entire working life with the same employer are long gone.  Yet you still need to keep track of all that retirement savings.  The best way to take control of your 401k savings is to take it with you when you leave an old employer.  One of the 401k rollover options above will give you more control and investing flexibility than if you leave it behind.  And you won’t have to keep track of every 401k plan when you until retire.

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  1. says

    Interesting that you can roll a 401k over to a Roth IRA. I can definately see why high income earners would not want to do this because of the higher tax burden. Even without a high “salary”, it would seem like rolling a 401k over to a roth IRA would not be a good idea if your 401K balance was high too (say over $150,000) because that too would be counted as your “salary” wouldn’t it?

    • J.P. says

      The rollover amount doesn’t add or count toward your annual income. The biggest consideration is the ability to pay the taxes based on your tax bracket. This is best paid with money outside of the 401k, since any withdrawals from the retirement account are hit with a 10% penalty. It’s a rare case where someone falls into the lowest tax bracket and has the funds available to pay the taxes, but still an option for those that qualify.

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