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Will rolling over my 401(k) into an IRA result in higher investment returns?

Before asking ‘will I get higher investment returns?”, ask “what is the smartest way to rollover? “Otherwise, you may be paying more tax than you have to.

The best way to rollover your 401(k) to your IRA, is to contact your 401(k) plan administrator and tell them you want to do a ‘Direct Rollover’ to your IRA.

They will make your distribution check payable to the new IRA custodian. For example, payable as “Charles Schwab F/B/O John Smith IRA” and mail it directly to the receiving custodian or to your home. Do not sign the check. The custodian signs it.

After Tax in a 401(k) to IRA

The portion of the benefit that represents after-tax contributions should not be rolled over in most cases, to avoid being subject to the IRA recovery rules. Instead, choose to rollover all but the nontaxable amount.

401(k) Rollover Mistake – 20% Withholding

If your intention is to roll over to an IRA and request that a check be made payable to yourself (an indirect rollover), this will be reported as a taxable event, even if you intend to roll it over within the 60-day time limit to avoid tax penalty.

You will receive a check less the 20% mandatory federal withholding tax. When it’s time to complete the rollover, you need 100%. This means you’re 20% short. You must come up with the 20% within the 60-day time period that began running when you received the check from the company plan. If you can’t come up with the money, you will owe federal tax on the 20% plus a possible 10% early distribution penalty.

If you deposit the total amount in your IRA of the withdrawal within 60 days by making up the tax, you can recover the withheld taxes when you file your return. But, you have to come up with additional cash to make up the difference.

IRS can grant relief with a private letter ruling (PLR) giving taxpayers more time to complete the rollover, but PLRs are costly and time consuming. To receive a favorable PLR, there must have been a true intent to do a rollover.

Best option: Avoid 60-day rollovers and instead,  do a trustee-to-trustee transfer, also known as a Direct Rollover, whenever possible.

The direct rollover eliminates rollover problems. Direct Rollover transfers mean no one is touching the money in-between, which eliminates the 60-day problem.

So, will the rollover result in higher investment returns?

Your former employer is not going to watch it. Roll to IRA for more control and easier access to your money.

  • You’ll have a broader array of investing options
  • IRAs provide more flexibility for non-spouse beneficiaries, and may allow them to stretch distributions over a longer period of time
  • It’s a non-taxable event. It’s a direct rollover


Putting together a portfolio with thought and care may result in better returns.


For further information on this topic, feel free to call me and set up a consultation. James Shagawat p. 866-333-6659, jamess@baron-financial.com.

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