What to Know Before You Start an IRA Rollover

Do your homework before you start an IRA rollover

Person doing a roll in a kayak. Not quite the same as an IRA rollover.
Like rolling a kayak, best to know what you're doing before you start the rollover. Jock Montgomery / Getty Images

When you have money in a company sponsored retirement plan like a 401(k) plan, 457 plan, or 403(b) plan, when your employment ends you have the option of moving your retirement money directly to an IRA account. This is called an IRA rollover.

Here is what you need to know before you start an IRA rollover.

Know the difference: IRA distribution vs IRA rollover

If you take your retirement money as a cash distribution you will have to pay income taxes, and if you are not yet 59 ½, your distribution will be subject to a 10% early withdrawal penalty.

If you use an IRA rollover to move your retirement money from your company 401(k) directly to an IRA account, no such taxes will be assessed. Instead your retirement money will remain tax deferred, and you will not pay taxes until such time as you take a cash distribution.

Learn steps needed to start an IRA rollover

1. Choose a financial institution where you want to open your IRA account. If you already have an IRA you can rollover your company retirement money into your existing IRA. Call the company where you have an IRA or where you would like to open your IRA account, and tell them what you would like to do. They will offer guidance.

2. Call your company retirement plan phone number. Tell then you are no longer employed and you would like to rollover your retirement money to your IRA account. They will most likely send you a packet of paperwork you will need to complete. Sometimes they will be able to assist you over the phone.

3. Get help if you don’t know how to complete the paperwork. After-tax money can be rolled directly to a Roth IRA. Roth 401(k) money should be rolled to a Roth IRA account. Regular tax-deferred contributions can be rolled over to a regular IRA account. If you complete the paperwork or the IRA rollover transaction incorrectly it can cause big problems later.

Ask an accountant, fee-only financial advisor, or the financial institution that is the home of your IRA account for help.

Decide if you should use an IRA rollover or leave the money where it is

If you are between age 55 and 60, think twice before you rollover retirement money to an IRA. You may have the option to take penalty free withdrawals if you left employment after age 55.

Get educated. If you do not know anything about investing, you are at risk of making big money mistakes or being talked into doing the wrong thing by the wrong person. Wondering what you should invest in? Maybe you need professional guidance before you get started. If you want a great book on the investing subject, check out Four Pillars of Investing.

Know the advantages of an IRA rollover

1. More control over the investments. Within your 401(k) plan or other company plan a set number of investment choices are provided for you and the company may change plan providers at any time.

2. Potentially lower costs. The funds inside your company plans charge fees in the form of an expense ratio. You can choose similar quality investment with lower fees by using index funds in an IRA rollover account.

3. IRAs may make things easier on beneficiaries.

Not all company retirement plans offer the same rules as to how your beneficiary can withdraw funds. In an IRA account, your beneficiary will have the option to take distributions out slowly over their life expectancy. They may or may not have this option if the money stays in the company plan.

4. Ability to choose safe investments. Company retirement plans do not usually offer a wide selection of ultra safe investments, like government bonds, certificates of deposit, and fixed annuities. If you want no risk, you may have more choices by rolling your money to an IRA.

Avoid mistakes

Your retirement money is creditor protected and is tax-deferred. You do not want to lose these attractive benefits. Learn everything you can about how to avoid making costly mistakes. If you get stuck, seek the assistance of a good financial advisor.