How Does an IRA Rollover Work?

As you change employers, you’ll likely also have a new retirement plan. Often, people switch jobs without taking their old 401(k) or 403(b) account with them. While leaving your old plan with a former employer is often an option – there’s a good chance it isn’t the best one given your other choices. 

401(k) to IRA Rollover Process

A 401(k) or 403(b) rollover to an IRA is a popular choice for those with assets in an old retirement plan. The exact rollover process will vary depending on whether you plan to open your new IRA rollover account with a new custodian or stick with the custodian for your old retirement plan. 

Selecting a custodian

One of the benefits of rolling over your old 401(k) retirement plan to an IRA is that you can consolidate more assets under one custodian. The downside of switching custodians is that you may need to liquidate the positions in your account before they can be transferred. Sometimes brokerage firms purchase proprietary products and they won't allow you to own those securities if you move elsewhere. 

The good news is that with an IRA, you're no longer limited to the same limited investments that were made available to you under the employer-sponsored 401(k) plan. Given all of these new investment options, it often makes sense to reevaluate your holdings even if you don't change custodians. 

Also Read: What Should I do with an Old 401(k)?

Options for retirement accounts with previous employersRolling over your old retirement plan

To initiate an IRA rollover, you will need to open an IRA with your chosen institution. If you already have an IRA account you may be tempted to roll over the new assets into your existing plan. As part of an asset protection strategy, we suggest you consider creating new IRA rollover accounts for each old qualified retirement plan you roll over and also discontinue contributions to rollover accounts. 

The most common rollover method is a direct rollover where your old retirement plan assets are liquidated and the funds are then sent directly to another institution. This allows you to take advantage of the much larger pool of investment options you now have available to you to set up a new asset allocation.

Another direct rollover option allows for an “in-kind” transfer of the positions in your account instead of liquidating them. This method is more time consuming as you will need to work with your plan administrator and the new custodian to make sure an in-kind transfer is possible. 

If you decide to keep the assets with the old custodian, either rollover option explained above should be
available to you. Before sticking with your asset allocation from your old plan, take a look at the securities, their fees, historical performance, and how diversified your portfolio is. Taking a risk assessment is helpful to ensure your investments are aligned with your individual risk tolerance.

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