When is it Time to Rollover Your 401k Into an IRA?


When people leave their jobs, they often make plans to withdraw or rollover funds held in the company's 401k account. In some situations former employees have no choice but to rollover or cash-in the funds, but in many other situations people benefit from leaving the funds in the 401k account.

Mandatory Rollovers

Companies can choose whether or not to let former employees keep funds in 401k accounts after leaving employment. If a company plan requires former employees to move the funds, the employee normally has between 60 and 90 days to transfer the proceeds to an Individual Retirement Account. If former employees do not rollover the funds, the account custodian cashes-in the account and sends out a taxable distribution check. Employers automatically cash-in 401k accounts holding less than $1,000, and people can roll these funds into IRAs or take the money as a taxable distribution.

Weighing The Options

Former employees who can choose whether or not to rollover funds should examine the cost involved in making any changes. 401k plans are often fee intensive and charges for selling funds reduce the amount of any rollover. Likewise, people who buy mutual funds in an IRA often pay commissions equal to 4 or 5 percent of the purchase amount. If a 401k plan has mutual funds that suits the individuals needs then it makes no financial sense to pay money to move the funds to similar investments inside an IRA.

Vesting Schedules

401k plans contain vesting schedules, which explain how and when company contributions become the property of the plan participant. Contributions employees make themselves belong to the employee from the outset, but company contributions are not always vested until a few years after the funding date. If an employee leaves a firm before company contributions are vested then the employee should leave the money in place until enough time elapses for them to gain full control of the money.


Elderly people, those with health problems and others who are concerned about their own mortality should rollover funds from old 401k accounts to IRAs sooner rather than later. Many 401k plans require pay-on-death beneficiaries to accept 401k proceeds as a lump sum, fully taxable distribution upon the death of the owner. In contrast, IRA beneficiaries normally have five years in which to accept partial distributions which greatly reduces the tax burden in situations involving large sums of money.

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