How to rollover your 401(k)
There has been lots written about what to do with a 401(k) when you leave a job and why. I’m not going to rewrite those posts. Instead, what I do want to talk about is my experience rolling a 401(k) over into an IRA. I’ll show you how to do it and pitfalls to avoid.
When you leave an employer in whose 401(k) plan you participated, you have some decisions to make regarding your retirement savings. Really, your options are three:
- Leave the money in your old employer’s plan
- Roll your account into the new employer’s plan (if allowed)
- Rollover into an IRA
I recently left my job and chose the third option - a 401(k) to IRA rollover. It had been many years since I did this last and I’d forgotten how it goes, so I thought I’d review it here.
Step 1: Decide where to open the IRA
There are several advantages to rolling a 401(k) into an IRA. Two of the biggest are investment options expand dramatically (for good or bad) in an IRA and the opportunity to save money on fees.
401(k)s are inherently limiting. You’re limited in what you can invest in (that is, only what your employer offers). You also can’t take your business elsewhere if a 401(k) plan gouges you on fees. A rollover to an IRA gives you an opportunity to fix these problems.
When evaluating where to open your rollover IRA, you want to look at those two elements - investments offered and fees charged. In this case, bigger is better. You want to go with a large fund family or brokerage. Vanguard, Fidelity, and T. Rowe Price come immediately to mind. Generally, they charge very low fees on their products. They also give you lots of different investment options from which to choose.
But I didn’t use any of these three. I used USAA because they are my all-purpose financial provider. I’ve written before about their awesome service and I like having all my accounts consolidated in one place.
Step 2: Contact your choice and set up accounts, if necessary
After I decided to go with USAA for my rollover, I gave them a call. I already had retirement accounts of various types open with them. I wanted to prepare the ground for the rollover, though. I called USAA and had them open two new accounts - a Roth rollover account (since some of my 401(k) is the Roth type) and a money market account for the traditional IRA. Why money market? I want to rebalance everything once it’s consolidated, so this gives me the opportunity to do that.
Step 3: Call the administrator for your old plan
I then called the administrator of my old employer’s plan - Fidelity. They were excellent. They actually have a group of people assigned to assist people after they’ve left my old company. Naturally, they’re there to also try to get you to leave the money with Fidelity, but I did not get a hard sell.
I have a bit of a complicated situation in that I have traditional 401(k) contributions, Roth 401(k) contributions and after tax contributions.
There’s a big difference between an IRA rollover and a 401(k) rollover. In an IRA to IRA rollover, you never see the money. It goes electronically from one investment firm to another. Not so with a 401(k) rollover. In that case, the checks have to be sent to you (”For the benefit of [the investment firm]” is written on the checks) and you send them to the investment firm.
I think this is a stupid set-up for a couple of reasons. First, seeing a (hopefully) large dollar figure on a check makes people question rolling it over. I think it might encourage 401(k) withdrawals. Secondly, there’s a (admittedly small) chance the checks might be lost in transit or be deposited incorrectly. Finally, if you’re not careful and forget about it, you might take a withdrawal inadvertently.
Anyway, I recently got the checks in the mail and now have to close the loop and send the checks to USAA. At that point, the 401(k) to IRA rollover will be complete. Then it’s time for a complete review of my asset allocation.
February 28th, 2008 at 1:30 pm
I recently rolled my 401(k) plan into a Traditional IRA at E*Trade. I have been told that any CONTRIBUTIONS I made into my retirement plan can be withdrawn any time, penalty free, with the understanding that I would have to pay tax on the money, just like any withdrawal from a Traditional IRA. My question is, how does E*Trade know what were CONTRIBUTIONS and what were GAINS? Did my previous 401(k) plan instituion send E*Trade paperwork that outlines these figures? I do know that my roll-over money was sent directly to me, and then I forwarded it along to E*Trade. Any help on this would be appreciated. I’m 27 years old and would really like to use some of the retirement contribution money for the downpayment on my first house.
February 29th, 2008 at 7:38 am
Ray, that definitely doesn’t sound right to me. I think maybe the rep confused you about rollover IRA rules versus Roth IRA rules. In a Roth, you CAN withdraw contributions pentalty free (and tax free) at any time since you’ve already paid tax on them once. See my post >”Roth IRA as emergency fund” “Roth IRA as emergency fund” for an explanation.
March 1st, 2008 at 8:16 pm
I just wanted to mention that 401K roll-overs can defnitely have some hiccups and you have to be very careful.
I left some money in a 401K plan after I left an employer and then the company almost went out of business. Even though, the money in the plan was invested at a bank, the company has to approve any transfers. In my research on the Internet I read a lot of horror stories from people trying to recover their 401K savings. Luckily I got mine out in time.
When I left my last employer, they shorted me just under $900 on the roll-over. They said I wasn’t vested for that amount, which was inaccurate. Two years later, I’m still getting statements and my $845 is still stuck in their plan. I may have to file a complaint just to get the rest of my money.
Also, if you are married and live in a community property state, you will need to get your spouse to sign and you will have to have it notarized.
So, my advice is to handle the roll-over soon after leaving an employer and take control of your own retirement savings.
BTW, I also rolled-over to Etrade and they are great.
Bret Frohlich
www.bretfrohlich.com
March 8th, 2008 at 3:44 pm
[…] Your page is on StumbleUpon […]
July 5th, 2008 at 12:44 pm
Very useful and easy to understand article, thanks! To clarify your point about an IRA to IRA rollover, yes you will never indeed see the money, and this has its obvious advantages. Here’s an excerpt from
“When you leave your current employer, they will send you a check for your fully vested 401k retirement savings that you have accumulated. This is treated as a cash out transaction and your employer will be required to withhold a 20% tax amount, leaving you with only 80% of your cash. This is NOT what you want to do! Furthermore, you will be required to pay a 10% early withdrawal penalty if you are under the age of 55 and withdraw your 401k retirement savings as cash.
To avoid this cash out transaction, you must arrange for a Direct 401k rollover. Also known as a trustee to trustee 401k rollover, this rollover will instruct your old employer to make out a check in the name of your new 401k plan manager or “custodian” as they call it. This way, you will not be getting any cash. Your 401k funds will be sent to your new 401k custodian. Ask your new 401k custodian exactly how they want to receive this payment. Usually it will be like “Investment Banking Corporation, for the benefit of Peter James…”
Source: http://www.401klookup.com/rollovers-401k.html
The next step after this will be to inform your former employer’s retirement plan admin that you are making a direct rollover of your funds to your new account. The admin will ask how you want this check to be styled & printed. As soon as you receive the check, you should deposit it into your new IRA. There is a 60 day limit within which you must deposit this check to your new IRA or 401k, otherwise you will be charged tax on it, as well as a 10% early withdrawal penalty.”