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Sam Subramanian

401k Rollover IRA: 401k Retirement Plans' Booster Rocket, Rollover IRA

Sam Subramanian PhD, MBA

Switching your job? Retiring? Congratulations! A window of opportunity opens for you with the Rollover Individual Retirement Account or Rollover IRA.

In an era of corporate restructuring and outsourcing, Rollover IRA is among the most powerful means available for securing one's retirement. Yet, the potential of Rollover IRA to enhance one's retirement savings commonly remains under-appreciated.

Rollover IRA widens the range of choices available for investing your retirement savings. By offering investment choices hitherto unavailable in employer-sponsored savings plan like the 401k retirement plan, 403b retirement plan, or Section 457 plan, Rollover IRA provides you the opportunity to more aggressively grow your retirement savings.

This article discusses the advantages of a Rollover IRA as they apply to rollover of retirement savings from employer-sponsored plans. Although the article focuses on the rollover of retirement savings from a 401k retirement plan, the benefits of a Rollover IRA, as discussed here, apply to rollover of assets from other retirement savings plans such as 403b plan and Section 457 plan.

So, if you are leaving your job and have savings stashed away in your employer-sponsored retirement plan, continue reading this article to learn about your options and more.

Four Options for Your 401k Retirement Plan Savings

You have four options on what you can do with your 401k retirement plan savings if you are switching jobs or retiring.

  • Cash your 401k retirement plan savings.
  • Leave your savings in the 401k retirement plan sponsored by your previous employer.
  • Rollover your savings into the 401k retirement plan sponsored by your new employer.
  • Set up a Brokerage Rollover IRA and move your 401k retirement plan savings into the Brokerage Rollover IRA.

Unless you have a pressing need, it is best not to cash your 401k plan savings. First, cash withdrawals from the retirement plan will be subject to federal and state taxes. Second, your retirement savings diminish and you will have fewer assets to grow tax-deferred.

While the three other options will not erode your retirement savings and will allow your 401k plan savings to grow tax-deferred, they are not equal in their ability to help you grow your retirement savings.

Self-Directed Brokerage Rollover IRA Increases Your Investment Choices

Most employees earn meager returns on their employer-sponsored 401k plan savings. A Dalbar study reports that the average 401k plan investor achieved an annual return of just 3.51% during a 20-year period when the S&P 500 returned 12.98% per year.

Part of the problem stems from the fact that most 401k retirement plans offer only a limited number of investment choices. A Columbia University study finds the median number of mutual fund choices in 401k retirement plans to be just 13. The actual number of equity mutual fund investment choices however is less, since the median number includes money market funds, fixed income funds, and balanced funds.

With fewer investment choices, the 401k plan limits your ability to take advantage of different market trends and to continually position your 401k retirement savings in mutual funds with superior risk-reward profiles.

With a Self-Directed Brokerage Rollover IRA set up at one of the large mutual fund companies like Fidelity Investments, T. Rowe Price or Vanguard Group, you will break the shackles imposed by your employer-sponsored 401k plan and dramatically increase the number of mutual funds available for investing your retirement savings. Fidelity, for example, provides access to several thousand mutual funds including more than 175 mutual funds Fidelity manages.

Rollover IRA Mechanics - Fidelity Rollover IRA Illustration

Let's say you decide to rollover your 401k retirement plan savings to Fidelity. How do you make it happen?

First, set up a Fidelity Rollover IRA. Next, complete the forms required by your current 401k retirement plan administrator and request rollover of assets into the Fidelity Rollover IRA.

You have two choices for moving your retirement savings to your new Fidelity Rollover IRA. One is to elect to have the money transferred directly from your 401k plan to Fidelity. This is called direct rollover. With the indirect rollover alternative, you take the distribution from the 401k retirement plan and then deposit it in the Fidelity Rollover IRA. Unless exceptions apply, you have 60 days to deposit the distribution and qualify for tax-free rollover.

Driving Your Rollover IRA Performance

You need an investment strategy to benefit from the wide range of investment choices available in the Rollover IRA. You can develop the strategy yourself or leverage ideas from investment newsletters to manage your Rollover IRA.

The AlphaProfit Sector Investors' Newsletter, for example, offers model portfolios that are popular with Fidelity Rollover IRA investors. AlphaProfit chooses Fidelity mutual funds with favorable risk-reward profiles to construct the model portfolios. The Core model portfolio seeks long-term capital appreciation and is a worthy contender for investment dollars allocated to domestic equities within the Fidelity Rollover IRA. The Focus model portfolio is suitable for the aggressive-growth portion of the Fidelity Rollover IRA.

Compound Annual Return from 9/30/03 to 1/31/06

AlphaProfit Focus Model Portfolio 36.3%
AlphaProfit Core Model Portfolio 21.2%
Dow Jones Wilshire 5000 benchmark 15.3%

Let's say you transfer $50,000 from your 401k retirement plan to the Self-Directed Brokerage Rollover IRA and the wider range of investment choices help you increase your annual return from 8% in the 401k plan to 12% in the Rollover IRA. At the end of 20 years, your Rollover IRA will be worth $482,315, more than double the $233,048 it would be worth if you stayed with the 401k plan. That too without any cash additions to your Rollover IRA.

Adding to Your Rollover IRA

You can leverage the potential of your Self-Directed Brokerage Rollover IRA further by adding to it each time you change jobs. With the Rollover IRA already set-up, all you have to do is to instruct your 401k retirement plan administrator to transfer assets to the Rollover IRA. There is no limit on the amount of money you can transfer.

You may also add money to your Self-Directed Brokerage Rollover IRA through regular annual IRA contributions. They are however subject to the annual limit for IRA contributions.


When you are switching jobs or retiring, the Rollover IRA opens a window of opportunity for you to widen the investment choices for your retirement assets hitherto not available in the employer-sponsored 401k plan. The Self-Directed Brokerage Rollover IRA empowers you to construct and manage a mutual fund portfolio to boost the growth of your retirement savings.

Related Articles:
No Load Mutual Funds: Boost Your Portfolio's Returns
Using Sector Funds to Construct Diversified Mutual Fund Portfolios

Sam Subramanian



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