Dave Ramsey: 4 Easy Steps To Roll Over Your 401(k) to an IRA

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A 401(k) lets you build your nest egg while reducing your taxable income by sheltering your contributions before the IRS takes a bite out of them — and when your employer matches your contributions, you get free money to grow your retirement savings even more.

But when you leave a job — or even if you don’t — you might want to assert more control over your retirement fund by converting your 401(k) to an individual retirement account (IRA) that lets you pick your investments. It’s called a rollover, and it’s also a great way to unify scattered 401(k) plans from old jobs under one roof.

To make the rollover process less daunting, financial guru, author and radio host Dave Ramsey has broken it down into four simple steps.

1. Choose Between a Traditional or Roth IRA

Ramsey advises picking IRAs with the same tax structure as your 401(k). If you have a traditional 401(k), the easiest move is choosing a traditional IRA because they’re both funded with pretax contributions that you won’t pay taxes on until you start taking distributions in retirement.

If you have a Roth 401(k), a Roth IRA is your best bet because you already paid taxes on what you put in — although your employer’s contributions still face taxation — and you’ll never have to pay again, even on your gains, if you wait until you’re 59 1/2.

It’s possible to cross over, but Ramsey advises that you’ll have to pay taxes if you roll over a traditional pretax 401(k) into an after-tax Roth IRA. The good news is that your money then grows tax-free and you can make untaxed withdrawals in retirement.

Ramsey knows that’s a heavy load to digest and sums it up with this: “That’s a lot of information, but just remember: Traditional to traditional, tax-free today. Roth to Roth, mostly tax-free today and tax-free in retirement.”

2. Open a New IRA or Transfer To an Existing One

Ramsey suggests talking to an investment professional but believes that most people can open an IRA on their own without much trouble through a bank or brokerage’s website.

If you already have an IRA, you’re on easy street. Just follow your financial institution’s instructions to start the rollover or ask your financial advisor to assist. If not, choose a no-fee bank or brokerage that offers the type you want and get started.

3. Request a Direct Rollover From Your 401(k) Administrator

You can transfer your funds either through a direct rollover or an indirect rollover. An indirect rollover requires you to cash out your 401(k) and deposit the funds into your IRA within 60 days.

If you miss the deadline, you’ll get hit with “a massive tax bill and lots of penalties,” Ramsey wrote. On top of that, it’s simply not as convenient as a direct rollover, which moves the funds from your old 401(k) to your new IRA without you ever touching the money.

Ramsey wrote, “Trust us, you always want to go with the direct rollover.”

4. Pick Your Investments

Now for the fun part — picking your investments!

Many investment professionals recommend low-cost index funds and ETFs that are passively managed and mirror the performance of the indices they track, like the Nasdaq or S&P 500.

But Ramsey still advocates for old-fashioned mutual funds. He recommends dividing your money evenly between four types of growth-focused funds:

• Growth and income, or large-cap funds, which hold shares of the biggest companies
• Growth, or mid-cap funds, which contain shares of mid-sized companies
• Aggressive, or small-cap growth funds, that favor small companies
• International funds

Now the only thing left to do is watch your nest egg grow and help it along by maxing out your annual contributions.

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