401k Rollover: How to Roll Over Your 401k

Have you left your employer recently?  You probably got a notice that your 401k is being forced out.  Sometimes the windows to rollover your 401k are as short as 30 days, while some employers may not force you to move your 401k at all.

What is a 401k Rollover?

The IRS allows you to move your 401k once you’ve terminated employment.  This is called a ‘distributable event.’  Other distributable events include but are not limited to: attaining age 59 ½, disability, hardship, death.

It’s important to actually do a 401k rollover because the alternative of leaving it at you current provider or cashing it out could bring some serious penalties your way.  Unfortunately, too many people decide to cash out the account because they’re just not sure how to rollover their 401k into another type of account.  Not only does this mean the funds are taxable in the year you withdraw them, you are also going to pay a hefty 10% penalty if you’re under age 59 ½.  Dipping into your 401k and cashing it out early can really set you back, so it’s important to understand and follow through  with one of the following 401k rollover options.

401k Rollover Options

You should have an idea of what you want to do with your 401k before you leave employment.  If you lose your job suddenly, these options will work for you too, but it’s good to understand your options for rollovers beforehand.

Rollover Your 401k to a New 401k

If you’re able to secure a job soon after your termination, you can easily move your old 401k into your new 401k.  Simply notify your new HR department about your desire to open a 401k and complete the required paperwork.  Then, call your old 401k provider to obtain their paperwork.  You should have a statement, so call the number on the form.  Let them know that you need the request a rollover into your new employer’s 401k plan.  Sometimes they’ll process your rollover request right over the phone, so if you have your new 401k account number, be sure to have it on hand before you call.

Pros:  If you like the idea of keeping all your retirement funds together, this option might work well for you.  If the large balance will encourage you to continue saving each paycheck, go for it.  Employer retirement accounts are good for ‘hands-off’ investors who want to automatically save with each paycheck.

Cons:  Your investment options are limited when your invest in a 401k.  The next option of rolling over your 401k into an IRA will provide you with better options for investing, so read on!

Rollover Into an IRA

An IRA is a qualified retirement plan that is not directly tied to an employer.  You can contribute to an IRA with a personal check and choose from a much wider span of investments.

The process to rollover a 401k to an IRA is also simple.  First, you need to open an IRA with a broker.  Fidelity, Scottrade, Vanguard, and T. Rowe Price are some of the largest providers of IRAs and have very reasonable fees as well as good investment options.  Once you’ve opened your IRA, let your 401k account provider know that you want to rollover your 401k into an IRA.  They will either send some paperwork or even process your request on the phone.  Again, it’s good to have your account number on hand in case they ask for it.

It’s common for 401k companies to send you the 401k rollover check made payable to the new IRA custodian or 401k account provider.  You don’t need to sign the check – simply mail it to your IRA custodian or 401k account provider.

401k Rollover Checklist

Before you actually go through with one of these rollover options, take these points into consideration:

Are there fees associated with a 401k Rollover?

Most 401k plans will not have fees attached to a 401k rollout, but it’s still important to ask about fees or penalties.  This is one of the first questions you should ask the representative when you call your 401k provider to inform them of your intent to process a 401k rollover.

Are there any forms involved?

Many 401k companies can process your 401k rollover over the phone, but some require paperwork.  They may even require verification by your HR department if they don’t have it on record, so make sure you obtain a termination letter from your employer.

Is there new IRA or 401k paperwork?

You will be required to complete some paperwork when starting a new retirement account, so check with the new provider about any new forms that you’ll need.  Let them know that you have an old 401k to rollover and they’ll provide you with an additional form if needed.

Process as an Indirect Rollover or Direct Rollover?

If your employer forces out your 401k before you can complete a 401k rollover, it might show that taxes were withheld.  If this is the case, you can still send the check to your new retirement account (IRA, 401k or 403b) as long as you do it within 60 days.  This is called an indirect rollover.  If there was money withheld for taxes, you can send in an additional check to make up that difference.  This is a provision for indirect rollovers and should be approached carefully.  Make sure you’ve contacted someone from the new IRA or 401k company to follow any instructions they have regarding an indirect rollover.

A direct rollover is the most common and ‘hands-free’ way to rollover your old 401k.  This is when the company sends the rollover check directly to the new retirement account.

The rollover process is simple and easy to do, yet many people think that it’s a complicated task.  If you’re proactive and don’t procrastinate, you can use the 401k rollover to your advantage and enjoy the benefits of your new retirement account.

Have you taken advantage of a 401k rollover in the past?  Were there any complications that you managed to sort through?

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