I recently rolled over a 401k plan from my former employer-sponsored plan into a Rollover IRA at Vanguard. Rolling a 401k into an IRA is not difficult, but it takes a little time and preparation.
I put together this visual guide to walk you through the process of doing a 401k rollover into an IRA. Though this tutorial shows how to do it at Vanguard, the process should be fairly similar at other brokerages or financial institutions. I chose Vanguard because I have been with them for the better part of a decade and I prefer to keep my accounts as consolidated as possible.
Choose the best IRA custodian for your needs. You don’t have to go with Vanguard; many institutions can serve as your IRA custodian. Here are more tips on Where to Open an IRA.
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Deciding to Roll Over a 401k into an IRA
You first need to decide if you should roll over a 401k into an IRA. You can typically only do a 401k rollover after you are no longer employed by the company that sponsored the plan [Some people over age 59½ may be eligible for an In-Service 401k Distribution and do a 401k Rollover while they are still working].
In many cases, a rollover is a good idea because it gives you complete control over how and where you invest your assets, while many 401k plans have more limited investment options. There are other options for your 401k than a Rollover IRA, so be sure to investigate the options for your 401k when you leave your job.
Once you decide to go with a Rollover IRA, you will need to open a Rollover IRA. At Vanguard, you can roll over your IRA and complete most of the process online, download an IRA transfer kit and fill it out by hand, or call their customer service department for assistance. The Vanguard CS department is among the best I have dealt with, and they walked me through the entire process on the Vanguard website, then did a conference call with my 401k custodian and myself to complete the transfer. The process took about 30 minutes from start to finish.
How to Rollover a 401k into an IRA at Vanguard
The basic process is simple, open a Rollover IRA, then transfer in your funds to the Rollover IRA. Of course, there are a few more details that we will cover.
Before you get started with Vanguard, you will want to contact your current 401k plan custodian to determine how to initiate a transfer to another custodian. Some companies require several signed forms, while the company I transferred my retirement account from would only release the funds via a phone call (and the requisite security questions). Armed with this information, you are ready to start the transfer process.
Step 1: Rollover IRA Funding Method
Once you log on to your Vanguard account or open a new account, you can start the process. The first bit of information Vanguard needs is an approximate amount of your Rollover IRA transfer, whether or not it is a Roth 401k, and the location of the funds (e.g. are they still in your 401k plan, or have you received a check for the funds).
The answer to the location of your funds will alter the process slightly; if you have already received a check, you won’t need to involve the former custodian. However, you will have to handle more paperwork and risk early withdrawal penalties if you fail to make the rollover transfer in time. Personally, I think there is less risk in having the financial institutions complete the transaction without sending you the liquidated funds.
The next step is to inform Vanguard what information your current 401k custodian requires to complete the transfer. The current options are shown below. My former custodian required the following information: Rollover IRA account number, who to make the check out to, and the address. If you don’t know what your current plan requirements are, the Vanguard customer service reps or the customer services reps at your current custodian should be able to give you this information.
Step 2: Select Your Investments
This is where you choose how you want to allocate your rollover funds. It’s a good idea to know which type of fund you want to invest in before starting the 401k rollover process or transferring your funds. That way, you don’t get your asset allocation out of whack, and you won’t have to spend an hour trying to decide on which fund to invest in.
If you aren’t sure which type of fund is best for you right away, consider rolling your funds into the Vanguard Prime Money Market Fund or a similar low-risk fund until the transfer is complete and you have more time to do a full asset allocation.
You can choose additional Vanguard mutual funds once your account is open. (If you are doing this process at another mutual fund house or online brokerage, consider an equivalent to the Vanguard Money Market fund, at least until you have time to rebalance your investment portfolio).
Step 3: Account Information
If you are already a Vanguard customer, this part is easy, as you can log in at the beginning of the 401k Rollover process, and your information will be auto-populated. If you do not already have a Vanguard account, you will need to open one at that time. It’s been over ten years since I opened my Vanguard account, so I can’t tell you how long it will take. But based on other accounts I have opened recently, it shouldn’t be more than an extra 10-15 minutes.
Step 4: Review Your New Rollover IRA Account
The final step is a standard review and finalization process. You should go over your information to verify accuracy, electronically sign or print your application to sign it and send it in and designate your beneficiary. The beneficiary is automatically set by law if you decline to specify anyone different.
Even though I already have a Vanguard account, I was prompted to input my address for verification, but all other information was auto-populated.
Not Investing with Vanguard?
I wrote this review for rolling a 401k into an IRA at Vanguard because I have had an investment account with them for almost a decade. Most major financial institutions should have a similar process, though it may differ in some ways. The good news is that many companies will help you with the rollover process. Choose the financial institution you are most comfortable with and that best suits your needs, then call their customer service if you have any issues.
Need to choose a company to open a Rollover IRA? Here are some of the top recommendations.
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Roger @ The Chicago Financial Planner says
Great post Ryan and a great service for your readers. As Neal would likely concur, many folks do not roll their accounts over to an IRA because they are confused and apprehensive about the process. Your detailed account of the process and the ease of doing this will hopefully alleviate some of this fear and confusion.
Ryan Guina says
I can understand the fear of the unknown. I’ve made a few boneheaded financial moves due to lack of knowledge and understanding of rules. I’ve done well overall, but in hindsight, I know I could have done many things very differently!
Neal A. Deutsch, CFP says
Well written and thought out. As a Certified Financial Planner(tm) for decades, the present economy has brought me weekly calls for assistance in rolling over 401(k) plan assets. Since client understanding is paramount for peace of mind, the above is a great tribute to a process well designed.
Thanks, I don’t like paperwork and hate confusing stuff with this, which is why I set up the lifecycle IRA for myself, hassle free and stress free. I will talk to a rep before and to see my best options when the time comes.
That’s your best bet. They walked me through the process… it was very easy.
Call your current 401k custodian before you call Vanguard and ask what the rollover requirements are to transfer your funds to Vanguard. Then get a general idea of how much money you will be transferring – you will need both pieces of information before you start the process.
Start to finish, it only took me about 30 minutes and I did it all over the phone and sitting in front of my computer.
This is something I need to do in Feb. I was told by Vanguard that the 401K needed to be 2 years old before I could roll over. It seems like there is a lot of confusing paper work involved which has been a bit intimidating for me.
Craig, I didn’t have to do any paperwork to complete my transfer – I set up my account online and electronically signed it. The plan custodian for my former 401k plan only required the account number, name to make the check out to, and the address to send the check, and I was able to do that end of the transaction over the phone.
However, each institution you are transferring your funds from may have different requirements. Either way, I recommend speaking with the Vanguard reps and having them walk through the process with you. They are very helpful.