How to Roll Over Your 401(k) to Robinhood

Few personal finance goals are as important—or as confusing—as developing a solid retirement plan. Between traditional IRAs and Roth IRAs, 401(k)s, 457(b)s, and the rest of the retirement account alphabet soup, it’s a wonder any of us make it to our golden years with our sanity in place—let alone a steady retirement income.

Fortunately, it’s far easier than ever before to take steps toward a successful retirement, from figuring out what type of IRA (that’s an individual retirement account) you might need to obey the yearly contribution limits to initiating a rollover.

Case in point: In this article, we’ll walk you through the basics of various retirement accounts and help you understand how they work, before introducing you to one of the most popular IRA providers on today’s market: Robinhood. We’ll walk you through the taxes and fees you need to know about and focus specifically on how to open a rollover IRA with Robinhood, which can help you manage all your retirement funds in the same place if you’ve recently changed jobs.

Sound good? Let’s get to it!

Understanding Retirement Accounts

First things first: Let’s take a look at the different types of retirement accounts that are available, with a special focus on IRAs.

IRAs are a type of tax-incentivized retirement account that are accessible even to those who don’t have an employer-sponsored retirement plan, like a 401(k). (Those who do have access to such a plan can still contribute to some types of IRAs, though it may change the tax structure a bit—we’ll get to that in a moment.)

IRAs are a great way for anyone to pad out their retirement savings, or for gig economy workers and independent contractors to save for their retirement without the help of an employer-sponsored account. When you change jobs and leave an old 401(k) behind, opening an IRA to transfer those savings into can help you maintain those funds more actively and keep track of all your retirement money in one place. In short, IRAs are an excellent retirement option suitable for a wide range of individuals.

Types of IRAs

The two main types of IRAs—traditional and Roth— differ primarily based on how and when they are taxed. In short:

• Traditional IRAs are funded with pre-tax money, which means the contributor gets a tax break in the short term but will pay taxes on their retirement funds down the line.
• Roth IRAs are funded with after-tax money, which means contributions are not deductible, but the account holder will get access to tax-free retirement income later on.

Both traditional and Roth IRAs are governed by the same annual IRA contribution limits—the maximum amount the IRS allows a taxpayer to contribute to any and all IRAs they may own. For 2024, the limit is $7,000, or $8,000 for those aged 50 or over (thanks to what are known as catch-up contributions for taxpayers closer to retirement age). It’s important to adhere to these limits, because you may be liable for penalty fees if you overcontribute.

From there, however, the rules and regulations governing traditional and Roth IRAs begin to diverge. Let’s take a closer look at each type separately.

Traditional IRAs

As mentioned, traditional IRAs are retirement accounts that are funded with pre-tax dollars. That means the IRA contributions for this kind of IRA account are tax-deductible, and earnings grow tax-deferred until withdrawals are taken in retirement.

Traditional IRAs are available to anyone with an earned income, or whose spouse earns income. You can contribute to a traditional IRA even if you have access to an employer-sponsored retirement account, either through your workplace or your spouse’s—but depending on your income, there may be a limit to how much of your contribution is tax-deductible.

Like many other retirement accounts, traditional IRAs are subject to required minimum distributions, or RMDs, starting when the account holder reaches age 72.

Finally, keep in mind that withdrawals from traditional IRAs are taxed as regular income—which is why they’re a good choice for those who plan to be in a lower tax bracket upon reaching the age of retirement.

Roth IRAs

Roth IRAs have a slew of additional benefits and advantages that make them a very attractive option—but they’re also governed by a few more rules than traditional IRAs are.

For starters, not all earners can contribute directly to a Roth IRA. The IRS sets out eligibility requirements based on income level. In 2024, single filers must earn less than $146,000 per year to contribute the full annual contribution limit to a Roth IRA, and those married filing jointly must earn less than $230,000. (Single filers may still be able to make reduced contributions at income levels up to $161,000; the same is true for married couples earning up to $240,000.)

These limits mean that not everyone is eligible to contribute to a Roth—though high earners have found a legal loophole known as the backdoor Roth IRA, in which they initiate IRA transfers from traditional to Roth accounts (paying the required taxes in the bargain).

Because Roth IRAs are funded with after-tax dollars, there’s no up-front tax break for those who contribute to a Roth IRA. But for many savers, that’s a worthy trade for the promise of tax-free retirement income. Additionally, because taxes have already been paid on contributions, they can always be removed from the account without penalty. (Important note: The same cannot be said of Roth IRA earnings, which are still subject to the 10% early withdrawal fee.)

Plus, unlike traditional IRAs, Roth IRAs are not subject to RMDs during the original account holder’s lifetime. That means you can allow your earnings to grow indefinitely, or pass on a tax-free gift to an heir after you pass away.

However, there is one other important rule—or set of rules—to understand about Roth IRAs. It’s known as the five-year rule, and while this is an oversimplification, it basically states that a Roth account must be at least five tax years old before funds can be withdrawn. Otherwise, you may pay income tax on the funds all over again, effectively nullifying the most valuable aspect of this kind of account.

Additional IRA types

Along with the two primary types of IRAs we’ve just looked at, there are a few lesser-known—but powerful!—IRA options to keep in mind.

SEP IRA and SIMPLE IRAs

Simplified Employee Pension (SEP) IRAs and Savings Incentive Match Plans for Employees (SIMPLE) IRAs are designed for self-employed people and small business owners. They help such individuals expand their retirement savings (or their employees’) by allowing them to make an employer IRA match similar to the 401(k) match offered in many companies.

Psst: Robinhood also offers an IRA match, even for traditional and Roth accounts. Check out their IRA match FAQ for more details.

Specialized IRAs

Finally, there are a few more specialized IRA types, like spousal IRAs (IRAs a spouse can access by virtue of their spouse’s earnings), self-directed IRAs (IRAs in which the account-holder chooses and manages assets actively and which can hold alternative asset classes like real estate), and rollover IRAs (IRAs specifically for the purpose of receiving funds rolled over from a different retirement account—more on these below!).

The 401(k) Rollover Process

So: What, exactly, is a 401(k) rollover, and why should you care?

A 401(k) rollover is the process of transferring funds from a former employer’s retirement account—in most cases, an old 401(k)–to an Individual Retirement Account, or IRA.

You might want to initiate a 401(k) rollover if you’re changing jobs, leaving the corporate world to become an independent contractor, or retiring. Doing so can help you keep track of and actively manage your retirement plan, and when done correctly, the process doesn’t incur taxes or penalties.

But the “correctly” part is important.

401(k) Rollovers: Direct vs. Indirect

There are two main types of 401(k) rollovers: direct and indirect rollovers. Direct rollovers are the best way to avoid unnecessary costs (and headaches). Robinhood supports both direct and indirect rollovers and the process varies slightly depending on the rollover type.

• In a direct rollover, funds are transferred directly from the old 401(k) to your new rollover IRA or Individual Retirement Account. These are also known as custodian-to-custodian transfers because the money is never disbursed to you, the account holder, and the taxpayer.
• In an indirect rollover, the funds are distributed to the account holder, who must then deposit them into the new IRA within 60 days. However, the old custodian will withhold 20% of the money for tax purposes, and in order to avoid even further penalties, you’ll need to make up that amount out of pocket.

In short: If you’re doing a 401(k) rollover, choose a direct rollover if at all possible.

The Rollover Process: A Step-by-Step Guide

Now that you’ve got the basics—and the first rule of thumb to choose a direct rollover whenever possible—let’s take a closer look at the details. Here are the specific steps to follow to initiate your 401(k) rollover to Robinhood:

STEP 1

Start by setting up your IRA account with Robinhood.

When rolling over your old 401(k) to Robinhood, you’ll need to choose the type of IRA that matches the tax structure of the original account. So, for example, if you’re rolling over a Roth 401(k), you’ll need to choose a Robinhood Roth IRA to receive the funds. The same goes for traditional 401(k)s and traditional IRAs—you get the idea.

Make a note of your new Robinhood IRA account number – you’ll need this later when you contact your 401(k) plan administrator.

STEP 2

Contact your 401(k) plan administrator and request a direct rollover of your 401(k).

You’ll need to provide the required documentation in order to initiate the 401(k) rollover, likely including identification and forms provided by your former (and potentially current) employer.

STEP 3

Ask your plan administrator what details need to be on the check.

Make sure that the check is made out to Robinhood Securities FBO for your name IRA and your Robinhood IRA account number.

You can find your Robinhood IRA account number in the Robinhood App by navigating to Retirement, then Menu, and then Account Numbers.

STEP 4

Ask your plan administrator to send the check directly to Robinhood.

Robinhood’s address for rollover checks is Robinhood Securities, Direct Rollovers, PO Box 772994, Detroit, MI 48277-2994.

Keep in mind that paperwork ususally needs to be processed, so a 401(k) rollover isn’t an instantaneous process. These days, many providers can get the rollover done in just a few business days, but in some cases, it may take a week or longer.

STEP 5

Invest the transferred funds in your new IRA.

Once the savings are deposited into your Robinhood IRA, make sure to invest the funds by selecting the investments of your choice.

Now that you understand the process, let’s take a look at why Robinhood is popular among people looking to roll over their 401(k)s. In general, most savers look for low fees, a wide variety of investment options, and other account features that can help them boost their retirement funds and make their lives easier.

Introducing Robinhood

Robinhood is a popular commission-free brokerage with an easy-to-use platform and a wide range of investment options. Robinhood offers both traditional and Roth IRAs. New Robinhood IRA account holders can get a one-time custom-recommended portfolio, which is a great place to start for beginners.

Better yet, Robinhood offers a perk that few of its competitors can, well, match: an IRA match of 1%. Check out their IRA match FAQ for more details.

You can make commission-free trades and manage your account on the intuitive and attractive Robinhood app or its web portal. You’ll get access to real-time market data, customizable watchlists, and educational resources to help you make smart investment choices.

Accounts are also covered by SPIC protection and state-of-the-art security measures. A 24-7 customer support phone line is also available.

Robinhood does not, however, offer a robo-advisor option, so you’ll need to manage the accounts yourself. Along with Robinhood retirement accounts, the company also offers crypto and options trading, as well as taxable brokerage accounts.

Robinhood Gold

Although its basic tier is commissions-free (and free of account maintenance fees or minimums), Robinhood also offers a premium tier as a subscription service. This premium product is known as Robinhood Gold.

Robinhood Gold offers account holders enhanced features and benefits beyond what’s available at the standard level. For instance, Gold members get extended trading hours (which means the ability to make smart decisions while the rest of the market is closed), increased buying power (and amplified returns) with margin investing, access to professional research and data (to make even better-informed investment decisions)—as well as a 5% APY earnings rate on uninvested cash through partner bank accounts.

Robinhood Gold members get extneded trading hours, increased buying power with margin investing, access to professional research and data, and a 5% APY earnings rate on univested cash.

Provide considerations for individuals considering Robinhood Gold membership, such as assessing their risk tolerance and investment goals before utilizing margin investing.

Key Features of a Robinhood IRA

As you probably already know, there are plenty of online brokerage platforms out there vying for your attention—Fidelity, SoFi, Wealthfront, and Betterment, just to name a very few.  So how does Robinhood stand out from the crowd?

Commission-Free Trading

One of the best things about Robinhood is that it offers commission-free trading on stocks, ETFs, and options, which means you can buy and sell these asset classes without having to pay a per-trade fee. This is true for its regular brokerage account as well as its retirement plans, and those who read the fine print will notice they reference no limit and no cap to this perk. However, it’s important to note that Robinhood does not offer mutual funds at this time.

No Account Minimums

Furthermore, Robinhood’s IRA doesn’t come with any minimum balance requirements, which means you can open one with just a few bucks.  This dynamic makes Robinhood’s accounts accessible to investors of all levels, even if you’re just getting started.

Fractional Shares

Robinhood also enables investors to purchase fractional shares of stocks and ETFs, which means you can buy into higher-priced assets (say, Apple or Meta) with smaller amounts of up-front capital.

Diversified Investment Options

Robinhood IRA account holders can choose from a broad range of investment options, ranging from stocks and ETFs to cryptocurrency, fractional shares, and options trading.

User-Friendly Interface

The Robinhood app is well-known for its easy-to-navigate interface, which makes tracking investments, executing trades, and checking in with your IRA a snap, no matter where you are.

Automatic Dividend Reinvestment

Importantly for those hoping to maximize their returns at a minimum of effort, Robinhood will automatically reinvest dividends earned from your investments right back into the same securities without incurring additional fees. This helps keep your account growing, even between active trades.

Tax-Efficient Investing

Robinhood goes out of its way to help investors optimize their tax efficiency by offering features like tax-loss harvesting and tax-lot selection. Even without going into depth on how these tactics work, you can rest easy knowing they mean the lowest possible tax liability for you as an account holder.

Customer Support

Finally, Robinhood offers extensive customer support options for those in need of assistance, starting with a well-populated help center that makes troubleshooting issues a snap along with a 24/7 customer service support line. Robinhood’s customer support phone number is 1 (650) 761-7789.

Understanding Fees and Taxes

While a Robinhood IRA comes with very few fees, as discussed above, there are certain expenses that can crop in Robinhood’s fee schedule up to be aware of.

For example, although trades are commission-free, Robinhood passes on FINRA’s regulatory transaction fees and trading activity fees (TAFs), as well as any American depository receipt fees, to users. (These are usually minuscule—the TAF $0.000166 per share for equity sells and $0.00279 per contract for options sales, for example.)

A Robinhood Gold membership does come with subscription fees—$5 per month or $50 if you pay for the whole year at once. Certain types of withdrawals, such as those to an external debit card account or with instant bank transfer, may be subject to a fee of up to 1.75% of the withdrawn amount. (There are no transfer fees  for standard bank transfer withdrawals.) In some instances, such as an early withdrawal from a Roth IRA, you may also be charged a match removal fee if Robinhood has to remove their matched funds from your account.

Of course, you’ll still need to pay taxes on your retirement funds in one way or another. If you have a Roth account, taxes are paid upfront when funds are contributed, so you can look forward to tax-free withdrawals (so long as you follow the five-year rule and wait until you reach retirement age or another qualifying event).

Those with traditional IRAs will pay regular income taxes on their withdrawals—and if you have a regular, non-retirement investment account and you withdraw money from it, you may be liable for taxes on investment gains, dividends, and capital gains. Buying and holding for over a year is the best way to keep your tax burden low. Robinhood also helps the process by using tax-efficient techniques like tax-loss harvesting.

While there’s a lot of information available online these days, if you have specific questions about your retirement plan, want assistance monitoring investment performance or reviewing tax statements, or simply a greater understanding of your overall investment strategy, consider consulting with a professional tax advisor for personalized tax advice.

Capitalize Can Help Make Your 401(k) Rollover Even Easier

As you can see, if you’re in the market for a rollover IRA provider for your old 401(k), Robinhood is a great choice. At the end of the day, only you—and perhaps your professional advisor—can determine which custodian is right for your needs.

When it comes to the rollover process itself, though, Capitalize has you covered. We help make retirement planning easier than ever by walking you through the 401(k) rollover process every step of the way. We’re here to help!