Convert 401k to IRA at Job Change or Retirement

If you're like most retirement savers in the US, you've been employed by multiple company's throughout your career, leaving behind a path of partially-funded employer-sponsored retirement accounts. Consolidating these kinds of accounts into one particular central IRA can make good financial sense, but you'll need to be cautious when you convert 401k to IRA and pay attention to the details to eliminate costly fees and penalties. The process to convert a 401k to IRA should be done when leaving an employer or at retirement.

However, why should you combine your past accounts? Although any cash you've invested in employer-sponsored retirement programs will continue to grow un-tampered with, even after you've left respective employers. Yet, you probably are not earning the maximum benefit from your retirement savings. For starters, retirement accounts need to be regularly rebalanced in order to ensure that your investment options are still in line with your overall asset allocation plan.

In addition to the points below, one reason to convert a 401(k) to IRA could be for tax reasons. If you expect your tax rate to be higher in the future, as many do given that the US government needs to balance the budget, to convert your 401(k) to a Roth IRA could save tax dollars. The reason is when you do a Roth IRA conversion, you pay tax on your 401(k) dollars now and money you remove in the future will be tax-free. Note however that with a 401k to Roth rollover, you will need to pay income tax today to avoid potentially more tax later.

Next, it's important to keep in mind that employer-sponsored retirement plan offerings are notoriously constrained in order to increase employee participation. This means a more active or informed investor will likely not enjoy the 401k investment choices they desire. By moving your old employer-sponsored retirement plans into a single account when you convert a 401k to IRA, you'll have access to a wider range of purchase opportunities with higher potential returns.

Now that you understand why it's valuable to convert 401k to IRA accounts, let's look at the best way to do it. To convert the 401k to IRA, you'll need to first establish the Individual retirement account into which you'll be moving the money. Alternatively, you can use an existing traditional or Roth IRA account to receive the 401k funds.

Once your new account is established, you can begin to convert the 401k to an IRA. Contact the human resource departments of your previous employers or managers of each old employer-sponsored pension plan provider and order the documentation essential start to convert the 401k to IRA. Each program will likely have somewhat different paperwork, yet all of them will include a minimum of two major areas - a place to get details about the account receiving the 401k converted funds plus a section describing just how you'd like the transaction to happen.

In the section explaining how to convert a 401k to IRA, you'll generally have two choices to decide between. Either your employers retirement plan will handle the actual switch internally, an IRA direct rollover,without involvement from you, or else you can receive a funds which you will have to deposit into the brand new account. In almost all circumstances, it's best to allow the firms to directly transfer the funds, as this will avoid tax withholding and help you to prevent the potential penalties that can apply if the money aren't reinvested within a specific time period.