How a 401(k) Rollover Works


401(k) Rollover

Learn More About How a 401(k) Rollover Works

Many Americans are enrolled in 401(k) investment programs through their employer but aren’t aware of the various options available to them upon retirement or departure from their employer. Here we’ll consider the option of a 401(k) rollover and its potential benefits:

What is a 401(k) Rollover?

A 401(k) rollover typically involves shifting assets from the custodial account with an employer to a self-directed IRA account. There are two types of IRAs, so the most basic transfer would be to shift assets into a traditional IRA. A more complicated yet potentially beneficial option is also to transfer into a Roth IRA, but that would require paying income taxes on the funds so that distributions later in life could be tax-free, as they are in Roth IRA accounts started from scratch. For the purposes of our assessment, we’ll consider the benefits that apply to both types of rollovers.

Positive Aspects of a 401(k) Rollover

  • Better Fee Structure – It’s been widely publicized that 401(k) plans are notorious for having both high fees and hidden fees. It got to be so bad that Congress had to pass legislation forcing companies to divulge more details about the fee structure in their 401(k) plans for employees. Since self-directed IRAs allow people to invest in virtually any stock, ETF or mutual fund they choose, they are able to focus on low-fee investment options. That alone, often even more so than actual performance, can make a huge difference in outcomes in total net retirement income.
  • More Choices – There are tons of different investment options for employees that transfer funds into an IRA. Since most company 401(k) plans have only a select few funds and company stock to choose from, the choices are quite limited. But in an IRA — aside from investing in lower-fee ETFs, mutual funds and individual stocks — you could even choose to invest in gold, real estate or any number of alternative investments, as long as it’s set up right from the outset. These choices allow diversification of asset classes and decrease the total volatility of a retirement portfolio, which is important as you reach retirement and need to rely more heavily on your nest egg for income.
  • Less Administrative Hassle – By removing the employer as the custodian of funds and taking over the assets yourself, you can buy or sell instantly and get immediate access to funds as you need them. With 401(k) mutual fund investments, you often can’t sell until trading closes each day, and then it can take days or even weeks to get access to the funds. So in addition to the fees, the administrative barriers are higher with company plans as well.

The information in this article is provided for education and informational purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness or fitness for any particular purpose. The information in this article is not intended to be and does not constitute financial or any other advice. The information in this article is general in nature and is not specific to you the user or anyone else.


Darwin is an engineer and MBA who takes an "evolutionary" approach to finance, writing about adapting to evolving financial management, tax, investing and savings opportunities. Making more money and saving more money is an adaptive process - join the evolution! He blogs at Darwin's Money and ETF Base. Follow him on Twitter @ Everyday Finance.

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