Rolling a 401k into an IRA is easier than you think

Kelly Dawson
November 7, 2018
7 min read
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Retirement. It’s a three-syllable word attached to endless sentences about a person’s past, present, and future. The majority of Americans are notoriously bad at preparing for this stage of life, either by not having anything saved by their golden years or by being far behind the recommended benchmarks for retirement funds throughout their careers. Stagnant wages can be to blame, as well as debts of all kinds, and just poor decisions. But there’s another truth to why planning for retirement can be so tough: Simply, for many of us, it’s hard to know where to get started. And in that confusion, it’s easy not to get started at all.

“Saving for retirement is something a lot of us feel that we can put off, but by doing this, we’re forgoing the benefits of tax-sheltering and compound interest,” says Alexandra Mora, investor relations associate at Swell Investing. “The earlier you get started, the better.”

Employees of companies that offer 401k plans should enroll as soon as possible, and those who are able to max out contributions—either in a 401k, IRA, or Roth IRA—should do so every year. Asset managers like Fidelity offer lessons in the best individual or business savings plans, and books like The Financial Diet provide insights into savings that make opening a retirement plan less intimidating. But let’s say that you did get started on this years ago, and you have an old retirement account that you haven’t touched. What are your options then?

“While keeping your cash in an old 401k is technically saving for retirement, it’s not necessarily the best option,” Mora continues. “Where you choose to invest your money matters.”

For those who fall into this common predicament, Mora recommends rolling a 401k into an investment plan like Swell. We talked about the benefits of this solution and how to get started, below.

Why would it be a good idea for someone to roll their 401k plan into Swell's investments?  

People often roll over their previous 401k into an IRA as it allows for more investment options and control. If you leave your 401k with your previous employer, the account is subject to fees, even though you can no longer contribute to it. If you cash out your 401k before you turn 59 ½, you’ll be hit with a 10 percent penalty, along with regular income taxes.

Swell gives you the opportunity to consolidate and grow the cash you once held in 401k accounts with any of your previous employers, and it gives you the opportunity to invest with intention while you do it.

Our portfolios make it easy to invest in socially responsible stocks that line up with the causes that you care about the most. The biggest five funds all contain oil, weapons, and tobacco companies. Rolling your cash into a Swell IRA gives you the power to vote with your dollars and to invest in the companies and the causes you believe in, all while setting yourself up for the future.

What are some drawbacks, if any? Are there ways to avoid them?

The ideal way to move the funds from your 401k  to an IRA is through a direct rollover. Direct rollovers are not considered taxable events, and tend to be a bit easier to process.

In the event that the funds can’t be moved via a direct rollover, an indirect rollover is the only option. An indirect rollover involves a distribution from your 401k where your funds are distributed to you, rather than to a new retirement account.

Indirect rollovers are a little more tricky because they're subject to withholding equal to 20 percent of the 401k distribution amount. Additionally, any retirement funds distributed to you that are not rolled over into a new retirement account within 60 days are considered to be a cash withdrawal and are subject to income tax, plus a possible 10 percent penalty if you’re younger than age 59 ½.

Luckily, most plan providers will accommodate your request for a direct rollover if you ask for it! Just make sure to open your IRA before processing the transfer, so that your plan provider has somewhere to send your money.

Can anyone with a 401k plan roll over their money? What are the rules involved with doing this?

The main rule to be aware of is that 401k can only be rolled over into a new account if the 401k is held with a previous employer. If the account is held with a current employer, it must stay where it is—but you can ask to change the investments that are in the account. Ask your plan provider if they have any socially responsible options.

What else should people be aware of if they are considering this option?

Some plan providers charge fees to rollover your 401k account. Not to worry—we’ll reimburse any transfer fees that your plan provider charges you when rolling over your retirement plan to Swell. Simply send us a statement displaying the fee and we’ll reimburse your Swell account as soon as possible.

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