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Finance: How to Roll Over Your 401k


If you’re like the 91 percent of U.S. workers who switch their jobs every 4 to 5 years, it’s likely that you have a 401(k) from an old employer, chilling out with all the investments you made circa 2009.

What you may not know though is that you could be making an even bigger nest egg for yourself by getting out of your 401(k).

Now, you might be saying to yourself, But wait, I thought 401(k) plans were awesome?

Well, that's true, they are. If you need a refresher, a 401(k)—and similar accounts like 403(b) and 457(b)—is an employer-sponsored plan that allows you to invest money in a retirement account before taxes are taken out of your paycheck. These plans are awesome while you’re working for your employer, but once you leave a company, you can’t contribute to the plan any further. While it might be tempting to just leave your money sitting there, most of the time you’re paying a lot of fees to let your money linger—fees you may not even notice, as they’re deducted directly from your investment balance.

When your 401(k) plan is set up, your employer hires an investment firm to manage the plan. These firms then charge a fee to plan participants—that's you—for being in the plan. Then a second set of fees come from your investments themselves. Employer-sponsored accounts offer employees a select set of investments to put their money into, usually only mutual funds and the sponsoring company’s stock.

The problem with mutual funds is that they come with a raft of fees themselves. First, they have general management fees—called expense ratios—that are automatically taken out of the balance of your investment to cover the fund’s operating costs. Second, fund managers change the holdings within individual funds by buying and selling individual stocks or bonds that make up the fund, which is called the fund's turnover. When the manager buys and sells these investments, the fund pays fees on those trades, which lowers the value of the mutual fund (and your 401(k) balance!).

So what’s a financially-savvy woman to do if she’s leaving a job but doesn’t want to leave her money behind?

Luckily, there’s an easy solution: an individual retirement account, or IRA. IRAs are similar to 401(k)s in that you can invest pre-taxed dollars to save up for retirement. You can open an IRA at any time, but in particular, once you’ve left an employer you can cash out the balance of your 401(k) and put it into an IRA without penalty. The technical term for this is called rolling over your 401(k).

Once you’ve rolled your funds into an IRA, it operates much like a regular investment account, where you have significantly more freedom to invest as you choose. You don’t have to put your funds to work immediately, but once you’re ready you can invest in anything from shares of Apple to bonds to exchange traded funds (also known as ETFs, most of which are fee-free!); some IRAs even let you buy fancier investments. It’s not a total free-for-all since you’ll still have to pay trading fees, but it makes your options much broader and, if you employ a buy-and-hold strategy, the costs are minimal. [Stay tuned to for a tutorial on how to approach these investment options if you're a newbie!]

So what should you look into when choosing a rollover IRA account?

01. Account fees

Look into the account fees on your 401(k) and on potential IRA providers. Many IRA accounts are no-fee if you do all of your transactions by yourself online, but many providers charge a pretty penny to get on the phone with an investment advisor if you end up needing expert help. Be careful not to find yourself hit with unplanned charges!

02. Trading fees

Trading fees are the per-transaction commissions charged on buying an investment. If you want to buy several individual stocks or like to make changes in your investments frequently, the trading fees can add up quickly. If you buy 20 stocks at $10 a trade, that’s $200 just to buy your investments!

03. Investments offered

One of the benefits of an IRA is that your investment options are much broader than with a sponsored plan. Most IRAs allow you to invest individual stocks, bonds, and ETFs, but some also include access to certificates of deposit (CDs), mutual funds, and even more exotic investment-like options. If any of these things are important to you, be sure to check before you commit.

As with any financial decision, deciding what to do with your 401(k) is primarily about assessing what’s right for you. Compare all the advantages of available IRAs, and remember that it's okay to consider your current 401(k) plan as a viable option (in fact, you can roll over into your new employer's 401(k) plan if you want—the process and considerations are the same as for an IRA). Taking emotional ownership over your retirement funds is the surest way to know that they’ll be there when you need them.