Choice of Custodian

• The choice of custodian is an important consideration when rolling over a 401k to an IRA. In order to avoid taxes and penalties, you need to roll the money over directly from the 401k to a new or existing IRA. If you already have an IRA in place, you can roll the 401k money into the existing IRA. If you do not have an IRA in place, you can contact any mutual fund company or brokerage firm to set one up. If you tell the custodian you are doing a 401k transfer, that custodian can get you the forms you need to do a direct rollover.
  
  

Change Investment Direction

• When you roll your 401k over into a new or existing IRA, you need to first look at the way the money is currently invested. Then you need to decide if that investment mix still meets your needs. If the mix of stocks, bonds and fixed income securities no longer reflects your needs, the rollover provides the perfect opportunity to re-balance your holdings. In most cases, the custodian receiving the funds will cash out the stocks, bonds and mutual funds held within the 401k, then use those funds to purchase the mutual funds and other investments at your direction. Take the time to examine each investment option carefully and choose the mix that best matches your age and your tolerance for risk.
  
  

Get Investment Advice

• If you are having trouble finding the best mix of investments for your IRA rollover, do not be afraid to ask the new custodian for advice. Many mutual fund companies and brokerage firms provide investment advice to their clients, and that advice can be quite valuable, especially if your investment experience is limited. You can also get independent and impartial advice from a fee-only financial planner. Fee-only planners are paid solely by their clients, and that allows them to give advice that is not tainted by their desire for commissions.
  
  

Taxes and Penalties

• If you fail to roll your 401k directly into an IRA, you will be subject to an automatic 10 percent tax penalty on the funds in that plan. If your 401k balance is $100,000, that 10 percent penalty means you lose $10,000 right away. You also owe ordinary income taxes on the money you withdraw, reducing your nest egg even further.