How to Convert Your 401K to an IRA

Transferring your 401k to an IRA is a very simple process, but not one you can do at any time, and there are a few things you'll want to make sure get handled correctly to avoid losing a chunk of your savings unnecessarily.

You can only transfer your retirement savings to a 401k immediately (typically within 30 days) after leaving a job. The rollover itself will take a bit of time so it's good to get started on this right away. The first thing you want to do is find a company that you want to take care of your new IRA (independent retirement account). Many financial companies you're probably already familiar with can handle this for you.

Once you've found a company and set things up with them to start your independent retirement account, contact the holders of your 401k account and inform them of what you're going to be doing and where your new account is. Make sure that they send the check directly to your new account and not to you. Technically you can take the check and deliver it to the new account yourself, but this can easily end up looking like you cashed it. When you cash out money from your 401k before reaching retirement age you are charged state and federal taxes, on top of a ten percent early withdrawal penalty. This is something you definitely want to avoid.

While an independent account can be very different--because you'll have more control over your investments, more options, and different contribution limit--you'll soon find having an independent retirement account is a lot like your previous account and adapt to the changes fairly quickly. Rolling your 401k to an IRA is, overall, a pretty simple process as long as you pay attention to a few key details.