How to Roll Over a 401(k) to an IRA to Avoid Owing Tax

Individuals may opt to move the funds in their employer-sponsored 401(k) account to an individual retirement account for several reasons, the most common of which are to consolidate multiple low-balance retirement accounts held through different employer plans, to take advantage of a fixed rate of return or being forced out of their previous employer’s plan. Rolling the balance from your 401(k) account to an IRA allows your funds to continue to grow on a tax-deferred basis until you are ready to retire.

Step 1

Contact the plan administrator for your employer-sponsored 401(k) account or a representative from your human resources department to determine your estimated vested balance in your retirement account and request a rollover packet. Many plans also offer online account access where this information can be reviewed and requested.

Step 2

Open an IRA at a financial services company of your choice. Individuals who are knowledgeable about what type of IRA they would like to establish may opt to do this online through their company's website, while those who are unsure of their options may choose to speak with an adviser to assist them with establishing their account. Your IRA can be strutured with as little or as much market risk as you are comfortable with, allowing you to keep on track with your retirement savings plan.

Step 3

Complete all of the forms contained in the rollover packet upon receipt and return them to your plan administrator within the time frame specified in your summary plan description. According to IRS guidelines, participants are given a maximum of 60 days to complete the rollover process. The rollover forms generally require you to provide the financial institution name and account number for the IRA that your balance will be rolled into as well as the rollover method you prefer. If a direct rollover is selected, your administrator will send the balance of your 401(k) directly to your designated financial institution for deposit into your IRA. If an indirect rollover is selected, the rollover check will be mailed to you and the liability lies with you to deposit those funds into your IRA account within the 60-day time frame.

Step 4

Confirm the 401(k) rollover was successfully completed by checking your IRA account balance about one week after the funds have been deposited. If there are any discrepancies with your rollover amount, be sure to contact your bank and your previous plan administrator to ensure any errors are resolved so that the figures reported on IRS Form 5498 will be accurately reported.

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About the Author

Based in Virginia, Amanda Banach has been a writer since 2009. Her professional work experience includes roles in media advertising, financial services and human resources. She holds a Bachelor of Arts in human resources management and is PHR-certified.

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