Rolling over a 401(k) retirement account from an employer to an IRA can be a tricky business. You need to follow the right steps to make sure the process goes smoothly.
“I think most people don’t understand that usually, when you transfer an account, a new institution pulls the funds from the previous institution,” explains Rick Brooks, principal at Blankinship & Foster Family Wealth Advisors in Solana Beach, Calif. “With a 401(k), your former employer has to push it out of the 401(k) plan to where you want to put it,” Brooks tells Straight Talk.
To help make your rollover seamless, Brooks put together a checklist for Straight Talk. Going through the steps below will help make moving your retirement funds from a 401(k) to an IRA a smooth process.
The 401(k)-IRA Rollover Checklist
1. Pay back any 401(k) loans.
If you’ve ever borrowed money from your 401(k) account, make sure you’ve repaid all loans before you leave your employer – they’re due upon your exit from the company. An unpaid 401(k) loan is treated as a taxable distribution, so if you owe $10,000, that money becomes reclassified as taxable income.
2. Select where you want to open an IRA.
Remember that an IRA is a type of account, not a type of investment. Your account can be at a brokerage firm, bank, Mutual Fund company or other financial institution.
3. Complete the account application and open your IRA account.
Make sure you designate your funds as a rollover. This will allow you to transfer the funds back into another employer’s retirement plan later on, should you wish.
4. Contact your employer or 401(k) provider.
Ask for a distribution request form. Make sure you provide all required signatures (some IRA rollovers get rejected because a spouse forgot to sign the paperwork). Note that your employer may require signatures to be notarized – or done in the presence of a plan representative.
Ask what, if any, fees you may need to pay to liquidate your investments and transfer them to your IRA.
Ask if you need to sell any investments before your account can be transferred.
5. Complete the distribution request form and send it to your IRA provider.
Be sure to elect a custodian-to-custodian transfer. Otherwise, funds will be sent directly to you, generating a 1099-R tax form. This means that, if you fail to deposit your funds into an IRA within 60 days, the funds may be considered a taxable distribution. Which means you’d have to pay taxes on them.
6. Follow up with your employer to ensure that it has processed the distribution form.
7. Check your 401(k) account to verify that it’s been closed.
8. Check your new IRA to confirm that the funds have arrived.
Note: There might be a delay of up to several weeks between the point when the money leaves your 401(k) and the point when it arrives to your IRA.
9. Even after your IRA has been funded, check back with your former employer to verify that all of your 401(k) has transferred.
The reason: Sometimes a late dividend or interest payment might be received and get “left behind.”
Have you ever rolled over retirement funds from a 401(k) to an IRA? Was it a smooth process?