Transfer Your 401(k) Into an IRA Without Getting Penalized

Can you transfer your 401k into an IRA without getting penalized

Although both 401(k)s and IRAs share the goal of encouraging retirement savings through tax incentives, they differ considerably in various aspects – withdrawal penalties, fees and investment options may all vary between plans.

When switching from a 401(k) to an IRA, you will receive a check made out directly to the new IRA with separate sections for pre-tax and Roth funds.


Every year, millions of people switch their workplace retirement accounts to individual retirement accounts (IRAs), but even this seemingly minor transaction can have serious tax repercussions. If you change employers and the new plan has high fees that make rollover unnecessary. Another concern may be whether retirement tax rates may change.

Tax complications can be avoided by following each institution’s instructions carefully. Each brokerage or robo-advisor has its own process for rolling over funds, so it’s vitally important that all details are accurate when transitioning your funds over. Any errors could incur substantial penalties that would sap years of returns; luckily this problem can usually be avoided as long as rollover occurs promptly and correctly – especially if only moving a small amount from a former company.


Rolling over a 401(k) into an IRA offers numerous advantages for investors, including keeping funds tax-deferred while growing more quickly than with an individual retirement account (IRA). Unfortunately, investors often don’t realize that fees tend to be higher for IRAs than with 401(k) plans, which typically benefit from economies of scale by pooling money together for retirement plans which help to lower participant investment fees.

Rollovers, the process of moving funds between retirement accounts, are relatively straightforward. Your plan administrator typically sends you a check made out to your new IRA institution who then deposits it directly into your account. It is best to reach out directly to them to find out exactly how this works before undertaking this transition.

An Individual Retirement Account, or IRA, offers more investment choices than employer-sponsored accounts; but be wary of becoming overwhelmed with too many choices, which may lead to hasty decision-making and ineffective trading. Furthermore, look for an IRA provider with minimal or no fees associated with it.

Investment options

As soon as you leave a job, your retirement savings have three options for handling. Either you leave it with your former employer’s plan; roll it over into your new employer’s plan; or transfer it into an individual retirement account (IRA), which typically provides wider investment choices and lower fees than 401(k) plans.

Financial institutions such as banks, brokerage firms and mutual fund companies offer Individual Retirement Accounts (IRAs). They typically provide access to low-cost index mutual funds and exchange-traded funds as well as hands-off options like target date funds.

When rolling over your 401(k) into an IRA, its money is transferred directly from your former employer’s 401(k) into an IRA provider – this process is known as direct rollover – and can help avoid taxes on it. Unfortunately, however, your former employer will withhold 20% of pre-tax amounts for taxes, which makes consulting with a financial advisor before making decisions even more essential.


Employer-sponsored plans offer greater investment options and fees, but IRAs provide greater choices in this regard. Rollover to an IRA may reduce or even eliminate management fees associated with your 401(k), plus providers often charge less when providing services for IRA clients than they do for 401(k).

Make sure that the fees associated with your new IRA don’t contain hidden costs; Bankrate’s brokerage reviews provide invaluable comparison tools that allow users to compare account fees, minimum balance requirements, investment options and customer service offerings among multiple brokerage accounts.

Direct rollover is an easy and efficient way to convert your 401(k) account to an IRA. Your old plan’s administrator will send a check for the vested portion, and you have up to 60 days after receipt to deposit it in an IRA or another plan, otherwise, the IRS could view this action as early withdrawal and charge income tax and a 10% penalty fee – although doing it correctly could save this additional expense!

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