401(k) Roll Over Rules

Benefits/Drawbacks

Shifting money to an IRA gives you flexibility in your investments, Emily Brandon writes in "U.S. News and World Report." With a 401k, your choices are limited to the company plan's offerings, but with an IRA, you're free to invest in anything except collectibles, which the IRS forbids. If you prefer not to pay close attention to your investments, however, a 401k with its limited menu may be attractive. It requires less work to manage, and the fees on a 401k usually are lower than they are for an IRA.

You can transfer the contents of your 401k into a mutual fund IRA, a brokerage IRA or your new employer's 401k, the Gen X Finance website states. If your former employer allows it, you also may be able to leave the money in that company's 401k. If you choose to move your 401k money to an IRA, a brokerage account offers the most flexibility, but it's also the most expensive. A mutual fund offers fewer choices, but it typically costs less.

To initiate the transfer once you make your choice, ask the 401k administrator at your former place of employment to either transfer the money to your new account or send a check to you to deposit. An administrator transfer is the better method, the Wells Fargo website states. If the administrator sends you the money, she must withhold 20 percent to cover the taxes you'll owe if you don't deposit the money within 60 days. If you don't complete the transfer within 60 days of initiating the transfer, the IRS treats it as a withdrawal and requires a tax payment.

After you complete the rollover, you should receive a 1099-R form the following January from your former employer's plan, stating the amount you withdrew from the 401k. You'll also receive a 5498 form reporting the rollover to your new account. You must report the withdrawal when you file your taxes, even though you don't owe any money. If the 401k administrator at your former place of employment withheld any money, you can request a refund when you file your 1040, assuming you competed the transaction within 60 days.