How to Transfer an Old 401K to an IRA

Deciding what to do with your company retirement account is an important decision because of the potential tax implications. Choosing to take the distribution will lead to taxation as if you earned the income, and potentially a 10% penalty if you are under 59 ½ and do not meet a qualifying exception. The risk of losing up to 50% of account funds, often leads to the decision to leave funds in an account until retirement.

When you change employers, there are three common choices to keep the funds growing in a retirement account. You may leave it with the old employer, transfer it to the new 401K account, or convert it to an IRA.

Transferring the account to an IRA gives you a wider range of investment choices and can significantly lower the fees charged to the account. There are two principal ways to accomplish the transfer:

Company to company transfer is the easiest way to make the conversion. Your former company sends a check directly into a qualifying IRA established with the broker of your choice. When your former employer sends the check directly to the IRA account, it is not a taxable event.

Take a check. Receiving funds in cash and depositing them into a qualifying IRA, gives you 60 days to make the transfer. The one caveat is that some employers deduct taxes on the withdrawal. To avoid taxation, you must redeposit the full amount by the deadline. Failure to re-deposit funds will result in taxation of any reduced balance. You could also incur a 10% penalty.

Roth IRA transfers allow you to gain tax-free growth for the duration of the account. However, when moving an account from a traditional to a Roth, you must pay taxes at the time of the transfer.