Katherine Gustafson is an author and personal finance expert from Portland, Oregon. She writes about investing for Wealthsimple as well as having written for Forbes, Business Insider, TechCrunch, and LendingTree. Katherine is a past recipient of the Izzy Award for outstanding achievement in independent media. She has a BA from Amherst College and an MA from Boston University.
Time is ticking by. Do you know where your retirement money is? If you’re like many of us, it’s scattered across the landscape in former employers’ 401(k) accounts like so much lost treasure.
There’s no time like the present follow the map to the X and reclaim what’s rightfully yours and consolidate everything into one account.
How to roll over a 401(k)
Like all retirement accounts, employer-sponsored 401(k) retirement plans come with hefty penalties if you pull your money out before its time is ripe. But that doesn’t mean the money is inaccessible; you can “roll it over” into another tax-deferred retirement account without losing a dime. You might even save on fees and and be able to choose a better investing service in the process.
Rolling your money over can be smart for a variety of reasons. Having it all in a single place is much easier than having a few thousand dollars here and another couple thousand there. Just think of the time and hassle it takes to sign in to multiple accounts every time you want check your money's status. And not to be morbid, but your heirs will thank you if you consolidate and keep them from going on a wild goose chase. Having all the money lumped together can also benefit you by reducing your fees and potentially allowing you more control over how your money is allocated.
Like everything involving retirement saving, rollovers come with specific restrictions and rules. One rule is that the IRS allows you to make one rollover in each 12-month period.
How you proceed with a rollover depends on whether you are receiving a distribution check from your 401(k) administrator or whether they will be rolling it directly over into whatever retirement plan you have designated to receive it.
1. Choose an account and a provider to receive the rollover
The first step in doing a rollover is to figure out which account you want your money rolled into. If you are with a new employer and enrolled in their 401(k) plan, an easy option is to have the previous 401(k) funds rolled in with the new. You can also open your own individual IRA account with a reputable brokerage or bank.
It's important to remember that you can only roll money over from one tax-deferred account into another without prompting the IRS to hit you with a tax bill. You can roll this money over into a new employer’s 401(k) plan or an individual tax-deferred plan such as an IRA . If you roll the money into a non-tax-deferred account like a Roth IRA, then you are on the hook to pay the requisite taxes.
When comparing options, check out the details of fees, investment options, and quality of customer service. Even a small difference in fees can have big effects on how much money you end up with after decades of saving. Check out investment choices; IRAs are likely to have more options for how you can invest your money than employer-sponsored plans will offer.
Can you roll over a 401k while still employed? Most plans permit you to roll funds over from an employer’s 401(k) to an IRA while you are still employed. Employees may want to do this to gain more control over and options for their investments.
2. Decide how you’ll manage your account
Assuming you’re moving money into a new IRA and not a new employer’s 401(k), think about how you’ll allocate your investments in the new account. How you choose to do this should depend on how long you have until you retire and how much risk you are comfortable taking on.
Many brokerage firms have the option of “all-in-one” account that are managed to decrease risk as you get closer to your retirement date. Alternately, you can choose which funds to invest in, customizing your level of risk and the distribution of your money to suit your specific desires. Many brokers have online risk surveys you can take to help the system provide recommendations for building a portfolio suited to your needs.
3. Open your new account
If you are planning to roll over your 401(k) money into a new IRA, check the website of the institution with which you’d like to open that account and find out how to do so. You'll likely be able to open the account online and manage it online.
The institution may require an initial investment, such as $1,000, to open the account. You'll likely be able to move this money to the new IRA directly from your checking account after setting up a connection between the institutions.
4. Find out how to roll the funds over
Whether you’re rolling your money into a new employer’s 401(k) or a new IRA at a bank or brokerage, there will be specific requirements and procedures for how to do so. Contact the receiving institution to learn their requirements for accepting the rollover.
Often the company from which the rollover originates will send a check to the new company, which may require that it is written in a specific way. They may also be able to accomplish the transfer via a wire, but this is more likely to come with fees attached; ask about any fees for each option that you have.
5. Start the rollover process
Once you know what to do, make sure to follow the instructions to the letter or you may end up with delays in moving your money over. You will likely have to fill out a particular form, whether on paper or online, to get the institution you’re transferring the funds from to send the money over to the new account-holder.
The transfer may take some time once you’ve put in your formal request, so inquire when you should check to make sure the transfer occurred successfully.
6. If you received a distribution, roll it over within 60 days
The most efficient way to get your money from one retirement account to the next is a direct rollover, but the institution from which you’re taking your money may have reasons to send it to you in a check instead of putting it directly into your new account.
Once you receive this check, the IRS gives you 60 days to put into a new retirement account in order to maintain its tax-deferred status. The only catch with this method is that the account-holder that distributed the funds will have removed tax from it, so you’ll have to replace that missing amount when you deposit the funds into the new IRA. Otherwise you’ll have to pay taxes on that distribution, as well as the usual 10% penalty on it for early withdrawal.
7. Name your beneficiaries
Don’t forget to notify your new account-holder what beneficiaries you’d like listed on your account.
Should I roll over my 401(k)?
There are many advantages to rolling over your money so it’s all in one place. Here are a few:
Maintaining your money’s tax-deferred status. The only way to avoid paying taxes on your 401(k) money before you start getting withdrawals in retirement is to leave it where it is or roll it over to another tax-advantaged account.
Viewing your whole retirement situation at a single glance. If you have all your money with a single company, signing into a single digital dashboard can give you the snapshot of all your retirement savings at once. It will save you the time and aggravation of tracking multiple accounts at different institutions.
Helping others gain access to your information. The simplicity of this single account can also help others who need to access your retirement funds, such as accountants monitoring your assets or heirs trying to reconcile your estate.
Ensuring a good balance. Having your entire retirement portfolio in one place makes it easier to make sure it is balanced and diversified, especially if you keep your money with a company that offers a solid range of investment options.
Saving on fees. Larger accounts may qualify for smaller fees, so it’s a good idea to bring more money together into a single account instead of maintaining multiple smaller ones.
How to roll over a 401(k) to an IRA
There are various reasons you may want to consider rolling over funds from a 401(k) plan to an IRA. An IRA is likely to offer you more control over your investments, including options to make your portfolio more diversified.
Rolling over a 401(k) into an IRA demands the same steps as rolling your account into a new employer’s 401(k), with the added requirement to open a new IRA if you don’t have one yet. To set up the new IRA, research the institution and account you’d like to open, apply online, connect with your checking account to put in an initial deposit, and then seek out information about how to roll over the funds from your 401(k).
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