What does it mean to rollover a 401[k]? [context: E*trade]?

I’m going through this process right now. A rollover is when you transfer your vested funds from your company’s 401K retirement savings account into a 401K at another company, or to an IRA when you retire. An IRA (Individual Retirement Account) is your own personal retirement savings account at the financial institution of your choice, and it, like the 401K, shields your savings from taxes as long as the money remains on deposit. There’s a lot more to know but this, but this is the basic explanation. Hope this helps.

As @Pachyderm_In_The_Room explained, it is “rolling it over” from one account to another. But it cannot be done by the holder of the account issuing you a check and then you go deposit it some where else. It has to be done as a transfer between two custodial institutions, so that you never get access to the funds. It is very common, and most brokerage firms will do it for free when you open an account.

It is not an investment decision in and of itself, it is just part of the administration of your funds.

The “roll over” MUST be done without you touching a check. To continue, the decision is who the account will be with and the IRA type ( Mutual fund, CD or something else ).

Often, people will rollover a 401K into a Roth IRA. When you do this, you must pay taxes on the money that is rolled over. So if you rollover 100K of funds, that will put you into the 25% tax bracket (all earnings over 71K), and for any amount over 71K, you’ll pay that rate. If your regular taxable income was 71k, you’d pay $25,000 in taxes.

You can choose to rollover as much or as little of a 401K in any one year as you want. If your taxable income was 50k, you could rollover 21K without hitting the 25% tax bracket. Of course, you don’t know exactly what your taxable income is going to be when you rollover the money, usually.

If you convert to a Roth, you will pay no more taxes on the earnings on those investments. You will also be able to take out as much or as little money from the Roth as you want. No minimum distributions after you hit age 71. So it’s probably an advantage to be in a Roth.

Except, you want to pay taxes on your 401K or Roth when those taxes are lowest. So, for example, if you are unemployed this year, it would be a good time to rollover into a Roth. However, if you are earning a lot, and are in the 25% bracket, and think that when you retire, you’ll only be paying yourself in the 15% bracket, then you should let your money sit tight where it is, and only take it out when you are in a lower tax bracket, after retirement.

There is no particular reason to rollover from one 401K to another regular IRA, except that you might prefer another company to manage your money. Maybe you want to consolidate your money in one management company. Maybe you’re in Oppenheimer and you want to move to Vanguard because it has lower fees.

Another reason you might want to pay taxes now on money is if you are trying to get cash out of your accounts, like when you are preparing for a child to go to college. Colleges will take up to fifty percent of your after tax savings, so if you can move your savings from after tax to protected funds, you can reduce your burden. One way is to convert a 401K to a Roth, and pay the taxes on that with after tax money. This reduces your after tax money, while allowing you to rollover into the advantages of a Roth account. You just have to be careful you aren’t paying more taxes than you would need to if you held the money where it is until retirement.

As a stockbroker for 20 years, let me just say- a rollover is a way of transferring your 401K or other retirement account to another custodian ie from company 401K to a brokerage firm or from one brokerage firm to another. You should never receive access to you money during a rollover. You may rollover you funds as many times as you would like. Any financial institution will help you with this process.