The first thing to ask yourself when beginning this process is what kind of accounts your money is moving out of and going into.  A basic rule of thumb to keep in mind is that “like can accept money from like” when it comes to IRA transfers.  For example, if you have an employer-sponsored traditional IRA, you won’t have any trouble moving your funds into a privately-held traditional IRA.  Additionally, this rule typically extends to any transfer that occurs between two retirement funds that hold tax-deferred status.  Of course, there are exceptions, so be sure to check with your financial planner if you have any questions.

The key thing to remember to avoid taxes when performing a 401k rollover is that the preferred method for moving your money is a direct 401k rollover.  There is another financial instrument, known as an indirect rollover, but this type of transfer is often fraught with complications.  Use the indirect 401k rollover only under the supervision your financial professional, because if the indirect rollover is mishandled or the time to reinvest expires, you’ll be liable for penalties and any tax burden that’s created for the fiscal period in which you receive the money.

To initiate a direct 401k rollover, contact the manager of your new IRA (called the “target account”).  The administrator of your target IRA will, at your direction, contact his or her counterpart at the old 401k or IRA and request a direct transfer of the funds.  The value you want transferred will be sent to the new rollover or target 401k, usually by check or wire transfer.  It will never come into your hands, as the account holder.  In this way, the tax-deferred status of your money will be preserved.

As you might expect, there will be some paperwork to be filed with the IRS, but the managers of the old and new accounts will typically take care of this for you.  Know that this money is still your money, even though it never came into your hands.  By asking the administrators of the two accounts to act as your agents and by taking yourself out of the equation, you’ve reduced – if not eliminated – the risk of a new tax burden on your investment.

By adhering to this simple procedure, you’ll avoid any potential tax burden on the funds moved in your 401k rollover.

Protect your 401k IRA is practical, quick guide to the 8 steps rollover 401k IRA participants must take immediately to manage their investments and any gains they have made so far:

1. Pay yourself first.
2. Increase your contributions
3. Take full advantage of matching contributions
4. Know how your plan works
5. Become an informed investor
6. Use the six concepts of successful investing
7. Understand your investment vehicle choices
8. Build a core investment portfolio

Step 1: Pay yourself first

When asked why participants aren’t contributing to their company 401(k) plans, the most common answer is “Because I can’t afford to.” Unfortunately, for some people saving seems impossible: 10% is considerably more than they can afford, so they get discouraged and don’t save anything.

Step 2: Increase your contributions

This might seem obvious, but you can’t appreciate how important your contributions are until you see the consequences of not fully funding your 401(k). A few extra dollars going into your 401(k) now means a whole lot extra coming out.

Automatic dollar cost averaging takes the fluctuations out of the market. When you save in a 401(k), the same amount of money comes out of your paycheck each month. So, some months you’ll invest when the markets are up. Over time you should end up owning more shares at a lower price than if you had invested all your money at once. And, because your retirement account is growing through tax-deferred compounding, the more you put away, the faster it will grow. Remember the tortoise and the hare.

Step 3: Take full advantage of matching contributions

Don’t turn down free money! That’s what you’re doing if your company offers a matching employer contribution on a 401(k) or similar retirement savings plan, but you’re not participating. If you’re eligible, learn about the plan and your investment options and determine how much you should be saving to reach your retirement goal. Remember, an employee match is like getting a 100% return on your money!

Step 4: Know how you plan works

It’s important that you learn every angle of your plan and how to work it in your favor. What are the eligibility requirements and vesting schedule? What is a “key employee”? How do the distribution rules work? Are there loan provisions? Since only you know exactly how each of these plan elements affect you, the more knowledge you have, the better chance of success you have.

Step 5: Become an Informed investor

Don’t trade in and out of the market and get saddled with fees that chip away at your returns. Don’t simply default to investing for the short-term because you don’t understand. Plus, you’ll potentially miss out on gains that long-term investors enjoy with much less effort. Learn how to create your own personal investment plan for accumulating capital that can help you avoid investor panic and increase the possibility of achieving your financial goals.

Step 6: Use the six concepts of successful investing

There are six basic investment concepts that will give you the highest possible probability for success. Learn these and you will reap rewards that you never dreamed possible.

Effective diversification

Asset allocation

Asset class investing

Re-balancing

Compounding

Long-term Investing

Understand your Investment vehicle choices

Do your homework and learn about your 401(k) investment choices. You at least need to understand why and how things work. Don’t invest in anything that you don’t understand and establish reasonable expectations. The problem with the bull market is that it makes people think investing is easy and guaranteed; but, truly successful investors know and understand their investment options.

Step 8: Build a core investment strategy

A core strategy is the base or beginning structure of an investment portfolio that includes two or more asset classes other than cash. This term can apply to any kind of portfolio that uses fixed income as well as equity securities to reach stated investor goals. Most mutual funds use a core strategy in selecting their initial stocks within their portfolios, as outlined in the investment objectives. Core is the base, which all investment management strategies are built on. We’ll show you how to do it on your own.

First of all, you’ll need to decide what kind of 401k rollover account you want to open.  This will depend on your individual lifestyle and needs.  If you’re someone who’s self-employed or owns a business, you might want to look into an SEP IRA or a traditional IRA.  These two types of retirement accounts will allow you to use any deposits you make into the IRA as a tax write off.  However, the SEP IRA allows for a larger amount to be deposited each year and declared on your taxes, so it’s often the preferred 401k to IRA rollover option.

However, if you’re at a job that doesn’t offer a retirement plan, you might want to consider a 401k rollover to Roth IRA.  The Roth IRA doesn’t allow you to write off your deposits, but it does have a few other advantages.  Because the funds in a Roth IRA are contributed on an after-tax basis, they can be withdrawn tax-free later in life.  Of course, the downside to this is that any money you transfer from your existing 401k plan will be taxed when it’s put into the Roth IRA.  For this reason, many people opt for 401k rollovers to traditional IRA plans, and then open a separate Roth IRA for their newer deposits.

One way to help determine how to get the most out of your money is to talk to a qualified financial advisor.  The advisor will be able to help you complete a 401k rollover to an IRA with minimal effort, and they can advise you about all of the taxation rules and regulations you may encounter.

Of course, you can complete the 401k rollover it on your own – just remember that you’ll want to initiate a direct 401k rollover to help avoid any unnecessary taxation.  In this kind of rollover, the money is moved directly between banks, and since it never leaves an IRA account, it’s not taxed.  This isn’t the case in an indirect transfer (where you’re written a check to deposit on your own), which can lead to problems with taxes incurred through the 401k rollover.

As you can see, there’s no reason to feel stressed if you’re in the process of establishing a rollover 401k IRA account.  Just be sure to study all of the available options ahead of time to be sure that you’ve found the one that will best fit your needs.

Something else to remember about 401k rollovers is that you can avoid unnecessary problems with taxes if you opt for a direct 401k rollover.  This is a process in which the money is transferred from your existing account directly into a new IRA without ever leaving the banks.  Since a check is never issued to you, taxes won’t ever be assessed.  The money never technically leaves a qualified retirement plan, so the IRS doesn’t see a need to tax the money.  On the other hand, if you use an indirect method to rollover your 401k, you could end up with problems.

When you do an indirect 401k rollover, a check is issued to you for about 80% of the total balance of your 401k account.  The other 20% is held back for taxation purposes, as the money has technically left the qualified retirement account.  After the check is issued, you have just 60 days to redeposit the total amount into a new, qualifying IRA account.  Once this is done, the remaining 20% will then released into the new 401k rollover account.  However, since there could be complications with this method of rollover, most people simply opt to perform a direct 401k rollover.

Something else to consider about rollover 401k IRA rules is the type of account that the money is going into.  For example, if you’re doing a rollover from 401k to Roth IRA, you’ll need to withhold taxes.  This is because the funds that are contributed to a Roth IRA account have already been taxed, while the 401k is funded with money that comes out before taxes.  The upside to all of this is that the Roth IRA doesn’t require you to pay taxes when you withdraw money in retirement, as these taxes have already been paid.

If this initial tax burden is a problem for you, you’ll want to make sure that you do a 401k rollover into another tax-deferred IRA, like a traditional or an SEP IRA.  This way, no money will be deducted for taxes, and your investment can continue to grow tax-deferred for your retirement.

However, be aware that recent 401k to IRA rollover rule changes in 2010 make this burden more manageable.  For this year only, any taxes that come due as a result of a Roth IRA conversion can be broken up over the 2011 and 2012 tax years.  If you anticipate being in a higher tax bracket upon retirement, it may be worth the time spent consulting with a financial advisor who can help you decide if a 401k rollover to Roth IRA is right for you.

While it may seem simplistic, a very common mistake in the world of rollovers occurs when account holders request a rollover before the target 401k IRA (the account where you’re sending the money) is ready to get the money from the old account.  You might be surprised to find out that your new IRA may not immediately be ready to receive a 401k rollover as soon as it’s opened.  For example, if your IRA is employer-sponsored, there may be a delay of a few pay periods before you can move your old funds into the new account.

Fortunately, the first step you’ll need to complete in your 401k rollover is to contact the manager of the new, target IRA.  He or she will be able to tell you if the account is ready to receive the funds, or, if not, when it will be eligible to receive rollover funds.

When you talk to the account trustee or manager, be sure to ask what kind of account the new one is if you didn’t set the account up on your own.  There are rules as to what kinds of IRAs can receive a rollover from a 401k account.  Generally, there’s no problem transferring funds between the same kinds of IRAs – known in the financial world as the rule of “like can accept like.”  This means that going from one 401k account to another 401k account shouldn’t be a problem.  However, if you’re performing a 401k to IRA rollover, you’ll want to check with the manager of the new fund who can advise you about any possible exceptions.

Next comes the important part.  Once you’re informed that the target IRA is active and designated to receive the 401k rollover and that no restrictions exist to roll funds out of the 401k IRA, then you need to request a “direct rollover.”  This specific wording ensures that the funds will go directly from one account to another.  The money will not come into your hands, so you won’t ever see a check or bank deposit.  The money will simply move from one account to the next without your intervention.

If the money is sent to you as part of an indirect 401k rollover, the entire tax situation changes.  If you, as the account holder, receive the money, the transaction is then classified differently than in the case of a direct rollover.  In most cases, the withdrawal will become immediately subject to mandatory withholding.  In addition, if you don’t redeposit the money into a qualified retirement savings account, you may find yourself on the hook for ordinary income tax and additional early withdrawal penalties that will dramatically diminish the power of your retirement savings.

If your current employer offers a retirement program, you might want to complete a 401k rollover distribution to this new account.  This can be done in one of two ways.  First, you can request a direct transfer, in which the money is moved directly from your existing 401k account into your new retirement program.  If the target IRA is a qualified one, no taxes should come due on the money that you’re moving.

Your second 401k rollover option is an indirect transfer.  In this case, a check is issued to you for roughly 80% of the total of your former 401k account.  Once the check is issued, you have only 60 days to deposit the money into the new IRA account, according to current IRS statues.  Once the 401k rollover is confirmed, the remaining 20% of your account balance will be released into the new account.

If you don’t have a retirement plan under your current employer – or if you aren’t satisfied with the performance of this account – you’ll need to go through the different types of privately held IRA plans that are available today to find the one that will best fit with your needs.  For example, there are plans that are specifically designed for those that are either self-employed or who own a small business, as well as others that are open to those people who meet certain income restrictions.  Other types of IRA – like the traditional IRA – are available to everyone.

If you’re self-employed or own a small business, you’ll most likely want to look into opening an SEP IRA to receive your 401k rollover because it allows you to make larger tax deductible deposits than other types of retirement accounts.  You can also go with a traditional IRA, although this will limit the amount of income you can deposit and write off each year significantly, compared with the limits placed on an SEP IRA.

On the other hand, if you have a full time job, but your employer doesn’t offer you a retirement plan, you can go with either a traditional IRA or a Roth IRA.  These two plans are widely different.  The traditional IRA, for example, will allow you to claim the money that is deposited as a tax write off, whereas the Roth IRA will not.  Additionally, contributions to Roth accounts are made with after-tax funds, compared with traditional IRA contributions that are made before taxes are taken out.

This means that if you rollover 401k into Roth IRA, you’ll have to pay taxes on the money that’s already in this account.  The tradeoff, though, is that when you withdraw the money later in life, you won’t have to pay taxes on your withdrawals.  Because of the differences between the Roth and the traditional IRA and their tax implications, you may decide to hold a 401k rollover account that’s a traditional IRA, while making any new deposits to a Roth IRA account.

After leaving a job, your first thought when it comes to the money in your 401k should be to leave it alone until you know exactly what you want to do with it, and you’re sure all the necessary arrangements are in place to begin the rollover process.  You’ve worked hard for your money, and hopefully it’s worked hard for you and grown with interest and investment earnings.  The last thing you want to do is lose part of that money to unnecessary fees, taxes and penalties.

When you hold an existing 401k account, you’ll be happy to find that you’re eligible for a variety of different 401k rollover options.  For example, there are some types of IRAs that can only be opened by business owners, but there are others that can be opened by individuals.  A financial planner or tax consultant can help you compare all of the different types of IRAs and retirement savings options you have to help you choose the one that will best help you reach your retirement goals.  What works best for one person may not be the right choice for another, so take your time and figure out which one will be best for you.

The crucial thing to remember is that you want to set up a new account that will be eligible to accept a 401k rollover from your account.  The good news is that you can rollover money from a traditional 401k account to almost any type of IRA, except a designated Roth IRA or a Simple IRA.  As an additional benefit, you’ll be able to preserve the tax deferred status of your money through the rollover process (unless you’re moving your money into a Roth IRA).

Different financial providers have different regulations regarding initial deposits, as well as the amount of time that must elapse between opening of the account and its ability to receive a rollover contribution.  For this reason, once you’ve decided on the type of account you want, it make sense to compare several different providers and their retirement investing options in order to choose one that best suits your needs.

Once you’ve selected your new IRA account type and decided on a provider, contact the account trustee or manager of the new IRA.  This person has a couple of important jobs, the first of which is letting you know when your new fund will be ready to receive your rollover.  The second important job is helping you initiate the rollover.  Generally the account trustee or manager will have some documents that you’ll need to complete and sign.  As soon as this paperwork is finished, your 401k IRA rollover can be completed.

A 401k rollover to IRA allows the money from your old 401k account to move into a new IRA – either one that’s established through your new employer or one that you set up on your own.  There are different types of rollovers, but the basic principle is that the money moves from one qualified plan to another.  Provided you set up the rollover correctly, your money will continue to grow for retirement and you will continue to enjoy tax deferred status on the money that was previously invested in your 401k, as well as any money earned through your 401k investments.

Establishing a rollover 401k IRA account has another exciting advantage – the ability to choose from a wider selection of investment options (provided you elect to open a privately held IRA).  Most employers offer a limited selection of investment vehicles in their employer sponsored plans, as this has been shown to lead to employee confusion and, consequently, lower participation rates.  Unfortunately, this can limit your potential rate of return.  Moving your retirement funds to a privately held IRA gives you access to many potential investments, including stocks, mutual funds, ETFs, bonds and more, which may lead to increased growth in your portfolio.

Another benefit of a 401k rollover is it enables you to consolidate all of your funds under one account, which is typically easier for record keeping purposes.  This also has the advantage of giving you more money to work with within a single account.  Some IRA investments, for example, require a minimum amount of money before you can invest.  If you have all of your money in one place, it’s more likely that you’ll have the amount needed to make the investments you desire.

Taking advantage of a 401k rollover may also allow you to move your money from your old 401k into a newer type of account.  In general, 401K accounts have been around for a while, and the structure of your 401k may no longer be in line with your investment goals.   Any time you change jobs, it’s a good idea to review your financial situation to make sure you’re on track to reach your goals.

For example, hopefully your new job brings with it increased pay.  Does it make sense to increase your IRA contributions?  Or should you keep your IRA contributions where they were and invest money in a different vehicle?  These are the questions you may want to consider with the help of your tax accountant or a financial planner before initiating a rollover from 401k to IRA.

If you’re thinking of a rollover, it’s likely that you’ve recently changed jobs or had some other major change in your life.  One of your first questions should be, “Do I even need to establish a rollover 401k, either to or from an existing 401k?”  For example, you may believe your old 401k account isn’t performing up to its full potential, or you might have multiple 401ks or retirement investment accounts and think it would be a good idea to consolidate those accounts to simplify, or even optimize, their management.

What you have to know is that moving your money from one 401k to another qualified retirement investment plan is the basis for all 401k rollovers.  In general, there are two different types of 401k rollovers – direct and indirect.  You’ll have to choose the right one in order to avoid the taxes and penalties that you may otherwise incur.

Consider direct 401k rollovers first.  With a direct rollover, your money goes from your 401k account directly into another qualified 401k or IRA account.  Most 401k accounts can be rolled over into a new rollover 401k or IRA, with the exception of Roth IRAs and Simple IRAs.  This transaction may also be referred to as a plan to plan transfer or a trustee to trustee transfer.  There are usually no 401k rollover taxes involved in this kind of transaction.

However, if you move your money to a Roth IRA, things are a bit different.  Roth IRAs grow with after-tax dollars, meaning that no taxes have yet been paid on your contributions.  This means that you will pay taxes on any money moved into a Roth IRA, unless you are moving it from a Roth IRA or Roth 401k in the first place.

Be warned – the most common mistake made in all 401k to IRA rollovers is not having the receiving IRA ready and able to accept your funds.  You can avoid this mistake by calling the trustee of the receiving fund and asking about the status of the new account.

An indirect rollover is another 401k rollover option, but it’s not the one you want to establish your new account with if you have another alternative.  This transaction is sometimes called payment then transfer, which should tell you something about how the transaction goes – you receive the funds from your 401k, typically in the form of a check, which you then deposit into a new IRA.

The drawbacks to this particular type of transaction are many.  First, you’ll have a limited amount of time to accomplish the second transaction.  If you hold on to the money too long, for example, not only do you lose potential interest, but the IRS will classify the transaction as a disbursement or payment and you may find yourself owing 401k rollover taxes and penalties.  Fortunately, it’s easy to avoid this risk by simply choosing a direct rollover or trustee to trustee transfer in the first place.

In all cases, the investment money is, in part or in whole, yours and you are entitled to it.  But if you take the money from your 401k and have it sent to you, that is not a qualified 401k rollover.  Your intentions to put the money right back into another retirement account don’t matter – when funds come into your hands, it can be deemed a distribution by the IRS, which falls under a well-defined schedule of fees, withholding and taxes.  This is to be avoided whenever possible.  In addition, a trustee of the account will have to withhold 20% of the value of the money transferred before they can even initiate the financial maneuver.  Other 401k rollover taxes and fees will kick in later in the fiscal period.

There are even some twists to requesting a 401k rollover in the first place.  An indirect rollover is one option, but it’s probably not your best one.  This transaction can also be called payment then transfer, which gives you some indication of how the IRS views this operation.  In this situation, you would receive the proceeds from your 401k, usually in the form of a check, which you would then put into a new IRA.

Know that you have a fairly limited amount of time to accomplish this transaction – hold on to the money too long and not only do you lose potential interest, but the IRS can, and probably will, classify the transaction as a disbursement and you will be charged 401k rollover taxes and penalties.  You can avoid this by asking for a direct 401k rollover, which is also called a trustee to trustee transfer.  In a trustee to trustee transfer, your money will go from your 401k account directly into another qualified plan.  This plan may be another 401k or some other type of IRA – the exact structure of the new IRA usually doesn’t matter (except in the case of Roth IRAs).

This type of transaction is sometimes called a plan to plan transfer – again, the name tells you what the IRS thinks and how they will handle the tax assessment.  There are usually no 401k rollover taxes involved in this kind of transaction, as the money does not come into your hands.  However, if your money is being moved to a Roth IRA, your tax situation will be a bit different.  Because a Roth IRA involves after tax dollars, you will pay 401k rollover taxes on any money moved into a Roth IRA.  After all, the money you original paid into your 401k was pretax dollars – no income tax has been paid on that money yet.

The most common mistake made in any 401k to IRA rollover is not making sure that the receiving IRA is active and ready to accept the rollover.  Fortunately, this can be avoided by checking with the trustee of the receiving fund.  In addition, this trustee is the very person who has to be contacted to initiate the direct rollover, so you can often use this phone call to accomplish two things at once.