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How to Roll Your 401K Into an IRA

If you are recently unemployed or your company has just changed ownership, you have the opportunity to convert the existing company 401K to an IRA, otherwise known as an individual retirement account. Many people are intimidated by the prospect of this conversion but in reality, it is quite simple and offers many benefits.

The best reason to transition from a 401K to an IRA is that the number of investment choices you will have in an IRA is almost unlimited, while the company sponsored 401K plan will only allow a handful of options. You can begin to choose stocks or mutual funds based on your own research and preference, which in turn can be fun and rewarding. IRA’s can be opened at your local bank or an independent or online brokerage firm such as Scottrade. I prefer the latter because the fees associated with transactions are minimal.

Once you decide where you want to open your IRA, the chosen institution will provide an account number and form for which the 401K plan administrator can send the distribution check. This process can take several weeks or more. Once the money has been transferred, it will sit in a money market account. You can then begin researching stocks or mutual funds that you would like to allocate the money into. The allocations occur as a “buy order” that you place for your selected investment choice.

Great sources for researching investment options are Morningstar, MSN Money and Yahoo Finance. You can establish the rating on the stock or fund with Morningstar which uses a 1 to 5 star system based on the associated performance and risk of the investment. Another category to look at would be the percentage of return based on 1, 3, 5, 10 and 20 years. A third category to pay attention to are loads and expense ratios. These are the management fees associated with your particular investment. Just find a combination of these 3 categories that best balances risk, earnings and management fees to your liking.

An IRA allows your money to grow tax free until your retirement years similar to a 401K but with so many more investment choices. By taking charge of your investments through personal research and management, you will have greater control over the growth of your money and hopefully have a much larger nest egg for which to enjoy your retirement years.
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