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How to roll over your 401(k) in 3 easy steps

What we'll cover

  • What a 401(k) rollover is

  • Your choices for rolling over a 401(k)

  • Common questions about moving your 401(k)

You might know it as the task that’s been on your to-do list for longer than you’d like to admit since getting a new job. Whatever the case, addressing a 401(k) account from a former employer is an important part of the retirement planning process. The first step is understanding and carefully considering your choices for what to do with your asset. You could:

  • Leave the money in the plan with your old employer, if allowed

  • Roll over the assets to your new employer’s plan, if allowed

  • Roll over to an IRA

  • Cash out the account value

One popular choice is rolling over your 401(k), which can potentially help you gain greater control over your funds and keep your retirement savings better organized, among other things.

Rolling over a 401(k) retirement account from an employer might feel like tricky business. While there are rules to follow and consequences if you don’t, following the proper steps can make the process smooth sailing.

What is a 401(k) rollover?

If you’ve ever changed jobs and had to navigate the management of your retirement funds through that transition, you might be familiar with a 401(k) rollover. Put simply, it’s when you move the money from your 401(k) into another retirement account. That could be an individual retirement account (IRA), or, if you’re rolling over because of a new job, you might move it to the 401(k) with your new employer.

Why roll over your 401(k) to an IRA?

It might be tempting to leave your funds where they are or cash out your account, but it can be helpful to conduct a rollover — in fact, that consolidation might simplify your retirement planning for you. Here is a snapshot of reasons to roll over your 401(k):

  • Having multiple 401(k)s can be unnecessarily difficult to keep track of. Consolidate your old 401(k)s into one place to stay organized.

  • Fewer accounts could mean more flexibility to adjust and diversify based on changes in your risk tolerance.

  • Your old 401(k) could be costing you extra through higher fees.

  • You could have a wider range of investment choices through other retirement account types.

How do you roll over a 401(k) to an IRA?

Moving your retirement fund might sound complicated, but it doesn’t have to be. Follow these three steps to get started.

1. Choose what type of account you want to roll your old fund into.

You generally have two choices after you’ve decided to rollover your funds:

  • A new 401(k): Rolling over into your new 401(k) would enable you to see all of your retirement money in one place.

  • An IRA: Rolling over into an IRA can give you more flexibility and investment variety.

Quick Tip: Don’t forget about checking in on any fees associated with your new account.

2. Call your old 401(k) provider and get all the necessary forms together.

To move your 401(k), you might need the distribution forms for your old provider. It’s important to check because it can vary depending on the provider.

Pay attention to what type of rollover your old provider offers. You’ll likely see one of two methods:

  • Direct rollover: Your money is transferred directly from your old account to your new account.

  • Indirect rollover: The old provider sends you a paper check, which you send to your new provider. With this method, you’ll want to make sure you send the check to the new provider within 60 days, otherwise, you might get hit with a penalty fee or extra taxes.

3. Call your new provider and determine how you can start depositing funds into your new account.

The process of depositing money into your account can differ between providers, so you want to check to be sure you’ve got the right steps nailed down. This is also a good time to confirm that your old fund has rolled over into the new account properly. It’s always a good idea to double-check.

Having multiple 401(k)s can be unnecessarily difficult to keep track of. Consolidate your old 401(k)s into one place to stay organized.

Pros and cons of rolling over your 401(k)

Just like any other financial decision, moving your retirement fund has some benefits and some potential downsides. Before you make a decision about rolling over your 401(k) consider how these pros and cons might affect your long-term money goals.

Top pros of rolling over your 401(k)

  • Potentially easier to manage: Think of all the time you can save by having all of your retirement accounts in one place (not to mention the peace of mind). Even if it’s not a matter of merging accounts, rolling over from your former employer could allow you more control over your money without having to navigate your old workplace.

  • Avoid additional taxes: If you’re rolling over to another 401(k) with your new employer, a direct rollover will prevent you from potentially having to pay taxes on that income, allowing your retirement savings to continue to grow tax-deferred. If you’re moving to an IRA, you’ll reap the same benefits and avoid immediate taxes while continuing to pursue your retirement goals, tax-deferred.

  • More investment opportunities: If you roll your 401(k) over to an IRA, you may be able to significantly broaden your investment choices. While there are benefits to moving your 401(k) to another 401(k), this retirement account often offers narrower investment opportunities when compared to a traditional or Roth IRA.

Common cons of rolling over your 401(k)

  • Potential for more fees: Whether you roll over to another 401(k) or an IRA, you may see higher account fees. Since 401(k)s are employer-run, there’s typically less choice involved, but it is something to be aware of when you move your accounts. If you choose to roll over to an IRA, be sure to ask about account-level and investment-level fees as you consider your choices.

  • Less protection from creditors: If you roll your 401(k) over to an IRA, you should be aware that this kind of account has fewer protections if you’re sued. If someone wins a lawsuit against you, the Federal Employment Retirement Income Security Act prevents such parties from accessing the funds in your 401(k) to settle their claims. However, a creditor may access your IRA funds up to a certain limit, which varies by state, to settle their claims. Bear in mind that some IRAs may offer creditor protection up to a specific level, so be sure to inquire.

  • Delayed access to funds: If you roll your 401(k) over to an IRA, you may need to postpone your retirement plans by a few years. While 401(k) accounts will let you take a penalty-free withdrawal from your 401(k) account if you retire by 55, this exemption does not apply to IRA accounts. If you want to avoid fees (usually 10%) you will have to wait until you are 59 ½ to make withdrawals.

401(k) rollover FAQs

If this is your first time moving a retirement fund, you probably have a lot of questions. We’ve rounded up some of the most common ones below, along with the answers to get you and your 401(k) on the right track with your rollover.

How long do you have to roll over a 401(k)?

Many employers will roll your 401(k) over for you, but if that’s not the case they may disburse your account (aka write you a check for the amount that was in your retirement account). In this scenario, you will have 60 days to move that money to your new account. If you don’t, you’ll have to pay early withdrawal penalty taxes.

Do I have to pay taxes when rolling over a 401(k)?

As long as you move those funds over to an eligible retirement account, either an IRA or another 401(k), you will not have to pay any additional taxes on your rollover.

How much can I roll over from a 401(k) to an IRA?

There are no caps on how much you can move from a 401(k) to an IRA. While your new employer may have limits on how much you can contribute annually to your retirement account, those do not apply to your rollover. 

What are the pros and cons of cashing out a 401(k) instead of rolling over the funds?

The main benefit of cashing out a 401(k) is that you’ll have access to that money to use how you choose. But depending on your plan, it may take several weeks to receive the distributions, which also comes at a price. If you aren’t yet 59 ½, you will be required to pay income taxes on the money you withdraw as well as a 10% penalty tax, with some exceptions. 

Determine the best retirement savings vehicle for you

A 401(k) rollover doesn’t have to be the headache you might have imagined it to be. Keep in mind that different providers can require different processes, so it’s best practice to contact them to confirm you have everything you need. Otherwise, just follow these three steps when going through a 401(k) rollover, and you should have the basics down for a smooth rollover experience.

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