How to Roll Over a 401(k) in 4 Easy Steps
Rolling over your employer-sponsored 401(k) plan is almost as easy as falling off a log. Follow these steps, financial advisors say, and you'll get this task done smoothly, quickly and accurately.
"Rollover" is the term for transferring your tax-protected retirement savings from one account to another account. Typically, you roll over the funds from one employer-sponsored account to another employer-sponsored account.
Before you start, understand that it is critical to directly transfer the money from the current investment manager to the next one. This is called a "direct rollover." This is easily accomplished by first setting up the new account, then going back to the current account and requesting the money be transferred.
Financial advisors are adamant that this is the safest and most secure way to get the money from one investment institution to another. It may seem logical to clear out the current account by requesting a check made out to you, then walking or mailing that check to the new institution to deposit it in your new 401(k).
Don't do it. The repercussions are harsh.
"I'm always telling new clients that if they don't mind, we'd like to help them fill out the paperwork for the rollover. A common problem is not that people don't know the rule, but that they check the wrong boxes. The forms can be confusing," says Mike Piershale, president of Piershale Financial Group in Crystal Lake, Illinois. "Once it's done, it's done. You can't undo it."
You want to have the funds directly transferred from your old account to your new account without ever touching the money yourself. The administrators for the accounts are called "custodians," so look on the forms for guidance for directing the funds from the current custodian to the new one. "Make sure your name is not on the check," Piershale says, echoing the advice of other financial advisors.
If you have the check made out to you, the Internal Revenue Service requires the employer to withhold 20 percent of the funds. You can get it back by filing a separate form when you file your income tax return for that year. Then you must deposit that 20 percent into your new account within 60 days. If you don't, you have to pay taxes on it.
With that caveat in mind, here's how to get your funds rolling.
1. Find out what you're rolling over. Gather your current plan's statements and documents. Review the most recent statement to make sure you know the answers to the following questions:
-- How much is in the account?
-- How much did you contribute?
-- How much did your employer contribute as a match?
-- How much has your account grown?
Review the types of mutual funds you have and the growth patterns of the account. Understanding this gives you a point of comparison when you have to decide how to allocate the money in the new account.
Call the administrator or custodian for the current plan, and ask them to walk you through the rollover process. "They've done this hundreds of times," says Brian Kuhn, a certified financial planner with Planning Solutions Group in Fulton, Maryland. "Find out what information you need, from passwords to Social Security numbers," Kuhn adds. Allow at least an hour for the call, and take plenty of notes. Ask the representative if the company offers a checklist you can download to guide you as you assemble the paperwork.
People often assume they have to roll over the account when they change employers, but that's not so, Kuhn says.
It's easier to keep track of an account that's offered by your current employer, because the employer has set up communications channels about its savings and retirement benefits, Kuhn notes. If you keep an account with a prior employer's plan, you may miss out on communications, but you will still get account statements directly from the investment company, Kuhn says. Of course, if your job change involves a move, make sure you update your address with the investment company.
Most people roll over their accounts to consolidate the paperwork and move on from the prior employer, Kuhn notes. "If that's what causes you to take action and crunch some numbers, there's nothing wrong with that," he says.
2. Decide what you will roll it into. Usually, people roll their funds from one employer-sponsored investment advisor to another. But if you are leaving the corporate world, you may need to roll over the funds to an individual retirement account .
The structure of the retirement account is separate from the types of investments you have in it, Kuhn explains. "There are assumptions that an IRA is better by definition than a 401(k), but it's the investments inside the account that matter," he says. "In the world of IRAs, you can [invest in] anything -- certificates of deposit, annuities, individual stocks and so on. The world of 401(k)s is often just plain vanilla."
3. Set up the new account. Choose how to allocate your money among various types of investments and mutual funds. This is the time to review your fund decisions, says Lenny Sanicola, senior practice leader at WorldatWork, a benefits association based in Scottsdale, Arizona.
He recommends starting by reviewing the fund fees you have been paying and comparing those to the fees of the mutual funds offered by your new plan. "Mapping" funds means moving money from one fund to a similar one, such as from one large-cap index fund to another with a virtually identical portfolio. Sanicola suggests mapping your account's contents: Do you want to continue with the same type of investments in the same proportions, or do you want to shift funds into a different asset class mix?
Some plans offer online tools that provide guidance for your investing goals, Piershale says. Take the time to walk through this process, even if you think you know how much goes into each investment category, he adds.
Find out how much your new employer matches your savings, and see if you can contribute more, advises Todd Perala, director for retirement and trust and custody relationship management for retirement services at BMO Retirement Services.
Without auto-enrollment, people tend to contribute only enough to get the maximum employer match, simply because it seems like a good benchmark, he says. A smarter approach is to set two savings goals: a basic goal, which makes the most of the employer match, and a "stretch" goal, Perala says. That way, you are saving to achieve the goal you have set, not just reverting to the default guidelines offered by your employer.
4. Initiate the rollover. You should specify you want the funds transferred directly from the current custodian or administrator to the new one. Make sure the check is made out to the new investment advisor in a direct rollover.
When your funds safely land in the new account, tidy up the paperwork and schedule a midyear review on your calendar.
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