How to Rollover Your 401k into an IRA
October 24, 2012
When you leave your employer you usually remember to clean out your desk, grab all your personal photos, and take your box of stuff home with you. Unfortunately one of the most valuable assets you have to your name is often left behind: your 401k.
You don’t lose control of your 401k, the account is still yours. However, you forget to check in to rebalance your portfolio and over time your asset allocation is out of whack. Or worse, you forget about the account entirely and you never access the funds held within it.
Moving your 401k is not terribly difficult to do. Many people rollover their old 401k to their new employer-sponsored 401k plan. While this is a valid option, it doesn’t give you maximum control that you get from rolling the funds into a new Traditional IRA or Roth IRA. Your new employer’s 401k is still run by the company, and your fund selections are limited to what they offer their employees. In contrast an IRA can be moved to any brokerage of your choosing – and if you don’t like the options at the one you select originally, you can move it again.
6 Steps to Rollover a 401k to an IRA
Here is how to rollover your 401k in six easy steps:
1. Terminate Your Employment Officially
You cannot touch your 401k account at your old employer until you are officially no longer employed at the company. This seems like a simple task, but getting the proper documentation to your Human Resources department as well as to the company managing the 401k account can be a frustrating task. If you try to rollover your 401k before you are no longer an official employee, nothing will happen.
Ask for copies of important documents detailing the end of your tenure at the company and communication sent to the 401k management company. If there are any issues along the way, you will be able to fax the forms directly to the investment company without your old HR department needing to be involved.
2. Get Rollover Forms
While you are getting copies of your termination of employment, be sure to get the proper rollover forms that you will need. The goal is to avoid having to go back and forth between your old HR department and old 401k plan company after you are no longer employed with the company. Knocking everything out up front, or at least getting the forms you need, will save you many follow up phone calls and frustration.
3. Identify Brokerage Firm and Open New IRA
You need a place for your old 401k’s investments to land, which means you need to identify a new brokerage firm. Pick a firm that will meet your investment needs. A large mutual fund company such as Vanguard can provide you access to their low-cost mutual funds. If you plan to dump your investments into a target retirement fund, that may be a good fit.
Alternatively if you want a more diverse range of options such as individual stocks and bonds, mutual funds, and ETFs you want to look at a discount or full service brokerage firm.
Once you have identified where you want to open your IRA, take the necessary steps to open the account first before beginning your rollover.
4. Verify Brokerage Rollover Needs
After you open your IRA, or during the process, figure out what specific steps they need you to take to roll your 401k over to them. The process should be fairly similar from company to company, but you need to take the specific steps they ask of you to ensure a smooth transition.
5. Fill Out Rollover Forms
Next you simply fill out the rollover forms your previous employer provided you. You may have the option to withdraw the funds from your 401k and re-deposit them into a new IRA yourself. Avoid this option and choose to do a direct rollover. If you withdraw the funds yourself you can make mistakes along the way (or simply take too long to open the new IRA) and the withdrawal will be classified as an unqualified distribution from your 401k. You’ll pay a early withdrawal penalty plus income taxes to the IRS.
With a direct rollover your investments are made payable (or transferred) directly to the new investment firm. It’s essentially where the 401k plan writes a check directly to the new investment firm rather than putting your name on the “payable to” line.
6. Wait for Funds, Make Changes
After you submit the appropriate paperwork, wait a few weeks before checking to see if your funds arrived. Your old 401k provider may drag their feet in processing your request because they don’t want to see your funds – that they earn fees off of – leave their management.
But don’t wait too long. If your new IRA company doesn’t receive the funds after two weeks, follow back up through the appropriate channels. If for some reason your receive a check in the mail in your name rather than the new brokerage name, immediately forward it on. You have 60 days from withdrawing the funds to reinvest them to avoid IRS taxes and fees.
After the funds are deposited, be sure to invest them according to your asset allocation plan. Your new IRA should fit into your total retirement plan rather than being invested as a single entity.
Bonus Step: A Tax-Free Retirement
The above steps will assist you in rolling over a 401k to a Traditional IRA. In retirement you will pay income taxes on the funds you withdraw. If you are looking to grow your nest egg and never pay taxes in retirement, you need to rollover to a Roth IRA.
You can’t rollover directly from a 401k to a Roth IRA, but you can still end up with a Roth IRA. Simply follow the steps above and then convert your Traditional IRA to a Roth IRA. You’ll be able to enjoy retirement tax-free!
What questions do you have about rolling over your 401k? Meet us in the comments!
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