What is a rollover
When you leave a job, you usually have a chunk of money sitting in a 401k. A rollover is just the process of moving that money into an individual retirement account, or IRA, that you control yourself. You aren't cashing out, so you shouldn't owe taxes if you do it correctly.
The two types of accounts
You need to know if your old 401k is traditional or Roth. A traditional 401k is funded with pre-tax money, meaning you haven't paid taxes on it yet. A Roth 401k is funded with after-tax money, so it grows tax-free. When you move these, you want to keep them separate. If you put a traditional 401k into a Roth IRA, the government will treat it as income and tax you on the whole amount. That is a trap that can cost you a lot of money in one tax season.
How to handle the transfer
The safest way to move your money is a direct rollover. This means the money goes straight from your old 401k to your new IRA without touching your bank account. If your old company sends a check to you personally, they might withhold money for taxes. You then have 60 days to deposit the full amount into a new account to avoid penalties. It is messy, so try to avoid it.
Where to park the money
Once the money hits your new IRA, you get to decide what to do with it. You might look into index funds & ETFs, which are baskets of stocks that track a specific market index to keep costs low. Some people prefer to open a brokerage account to manage these investments manually. If you don't want to pick investments, you could look at robo-advisors, which are services that use algorithms to build and manage a portfolio for you based on your goals.
What you should compare
Look at the fees each platform charges. Some places charge a flat fee for the account, while others charge a percentage of your assets. Keep an eye on the annual percentage yield (APY)—the amount of interest a savings product pays you over a year—to see if your uninvested cash is earning anything while it sits there. When you look at other financial products, like a loan for a car, you will see an annual percentage rate (APR), which is the total cost you pay to borrow money including fees. In the world of investing, you want the lowest possible friction and the lowest possible costs.
Common traps
Watch out for account maintenance fees that eat away at your growth. Also, make sure you aren't just sitting in cash. An IRA is just a bucket; you still have to buy the actual investments inside it. If you move your money and leave it in a money market fund, you might miss out on market gains. Finally, don't confuse your retirement planning with other goals like banking & savings, mortgages, or managing your credit cards. Those are for your short-term life; the IRA is for your future self.