Can you roll a 401(k) into an IRA?

When you leave your employer, whether because of a job change or retirement, don't forget about the savings you've accumulated. When you roll over a 401(k) to an IRA, you can take your money with you, ensuring you retain active control over the investment choices.

Let's learn more about the process and why it may work for your situation.

A 401(k) rollover to an IRA means you're taking the balance, or part of your 401(k) account and moving it into an IRA. Although you generally do this when you change jobs or retire, it sometimes can make sense to do a rollover while you're still employed, if allowed. You may, for instance, be able to take advantage of lower account fees or better investment options.

There are two distinct types of rollovers, direct and indirect. When you follow the appropriate steps, they end with the same result, but the process is very different.

• Direct rollovers occur when your 401(k) administrator issues a check directly to the financial institution that holds your IRA.
• With indirect rollovers, a check is issued to you, and it's your responsibility to deposit it in your IRA within 60 days. The check amount will be missing 20% of your balance that's held back just in case it's needed for taxes. That portion is distributed to you when you file taxes after your full 401(k) balance—the check plus the missing 20% that you'll have to supply from another source—is deposited into your IRA. You only can do an indirect rollover once every 365 days.

An indirect rollover has several steps and responsibilities, but it can give you short-term access to your retirement balance if you need the money for something crucial but temporary. It carries a big risk though. Any amount not deposited within 60 days is considered a distribution, and you'll potentially owe taxes and penalties. Direct rollovers avoid this risk, so it's usually the better option.

There are several reasons you may want to consider rolling your 401(k) into an IRA:

• Choice of provider. Nearly every major financial institution offers IRAs, so you can decide which provider has the best options for you. With your 401(k), you are bound to the institution chosen by the plan sponsor.
• Different investment opportunities. The investment options within a 401(k) are often restricted to an approved list, and you may not like the options. With an IRA, you may be able to invest in nearly any investment available on the public market.
• Lower expenses. You may be able to reduce your account costs. Your 401(k) plan may have internal costs on certain investment options that are called expense ratios. With an IRA, you may have access to lower-cost funds. Employer-sponsored plans also have administrative charges that companies may pass on to participants. IRAs don't have them, although they may have other management fees that usually aren't as costly.
• Less restrictions. With an IRA, you won't be bound by the plan rules of your former employer's plan like you would if you left your money in your old 401(k). IRAs have fewer rules, and they are simpler to follow.
• Simplicity of access. Having an IRA you control can make things like distributions or Roth conversions easier.

To begin an IRA rollover, you'll need to have an IRA ready to roll the money into. If you don't already have one, start by choosing a financial institution and getting the account open.

Next, ask your employer's human resources team or 401(k) plan administrator for the rollover paperwork. These documents will ask where you want the money sent and the account information for where it's going. Fill everything out and return it according to the instructions.

Lastly, monitor your 401(k) and IRA balances. When the rollover is approved and sent, you'll see a distribution from your account. When the deposit clears with the new institution, you'll see the balance reflected in your IRA, and the rollover will be complete.

You may have a choice between rolling your money into a traditional IRA or a Roth IRA. For the most part, you'll want to roll your 401(k) into a like-kind IRA—that is, putting a Roth 401(k) into a Roth IRA or a traditional 401(k) into a traditional IRA. This preserves the particular tax-advantaged nature of your contributions, earnings and withdrawals.

If you opt to roll traditional, tax-deferred 401(k) money into a Roth IRA, you'll have to include that amount in your taxable income for the year. That's because you'll be moving money from a pre-tax account to one that must be funded after taxes are taken out. This option may, however, be a strategic move depending on the tax bracket you're in now versus the one you expect to be in during retirement when you're making withdrawals.

Going the other way, from a Roth 401(k) to a traditional IRA, is not allowed. Since you've already paid taxes on the money you've contributed to a Roth, it can't revert to being pre-tax. You could cash out your Roth 401(k) and then invest it in a traditional IRA, but the tax liability on the earnings combined with a potential early withdrawal tax penalty often makes this an unwise choice.

Rolling your money from a 401(k) plan into an IRA that you control may provide you with more flexibility, lower fees and a wider range of investment options. Converting some of your money into a Roth IRA may help you strategically increase tax efficiency as well. All these benefits can provide you with greater financial security and allow you to be more generous with your money.

Before you begin a rollover, make sure you understand any potential tax consequences, especially if you plan to do an indirect rollover or convert any pre-tax balances into a Roth IRA. Consider meeting with a Thrivent financial advisor if you have any questions about the process or want to help plan a brighter future for you and your family.