The 401(k) Rollover Explained
Are you planning to, or have you recently left or lost your job where you had a 401(k)? The good news is that since these accounts are tied to your employer, once you cut your ties with that employer, you’re generally entitled to do what you wish with those funds. Unfortunately, a lot of people take unnecessary losses and penalties by withdrawing the funds. This can set your retirement back years, and tens of thousands of dollars. So, the best option is to opt for a 401(k) rollover.
The 401(k) rollover is ideal because it allows you to transfer your existing retirement account into another retirement account without being subject to unnecessary taxes or withdrawal penalties. Remember, retirement accounts like a 401(k) are funded with pre-tax dollars, and grow tax-deferred. That means if you take a premature distribution, the IRS is going to stick you with taxes on all of that money, and also apply an additional 10% penalty if you withdraw the money prior to age 59 1/2. This is a pretty raw deal if you don’t need that money for a dire emergency, yet so many people will take the penalty simply because they don’t know how to do a rollover.
Your Rollover Options
The first decision you need to make when it comes to rolling over your 401(k) is where you want to roll the money to. There are three primary options that I’ll discuss here and provide some of the benefits and drawbacks of each.
Rollover Into New Employer’s 401(k)
If you find new employment and they also offer a retirement plan such as a 401(k) or 403b, in most cases they will allow rollovers into your new account. But is this a good idea?
Pros: The benefit of rolling into your new employer’s 401(k) is that it doesn’t matter how much money you have since there are generally no investment minimums on the fund options. If your rollover isn’t that much, you may find that you don’t have enough money to properly diversify your money with a particular mutual fund company. In some cases, you need a minimum investment of $3,000 just to invest in a single mutual or index fund at a fund company. If your 401(k) balance is low, say $5,000, it will be harder to diversify that money than if you were to move it into the new 401(k) where you could spread the money out regardless of how much you have to invest.
Cons: Aside from that primary benefit, there are also plenty of drawbacks. First, is that you’re losing a lot of flexibility. Remember, these are employer-sponsored accounts, so as long as you’re an active employee, you’re bound to that plan and its rules. This means you’ll be stuck with whatever investment choices they offer, and will not have access to your funds again unless you want to take a loan (if it’s allowed) or you terminate employment. In addition, a lot of 401(k) plans have relatively high fees. This is especially true for smaller employers. You could find that you’re paying on average 1% or more for each investment when you could easily find a comparable investment outside of the plan for half that.
Rollover Into a Brokerage IRA
Another common option is to roll over your 401(k) into a brokerage IRA account. This can be done at almost any financial institution, but most often people flock to the discount brokers where trades have low or even no commission like TradeKing, OptionsHouse, E Trade, or TD Ameritrade.
Pros: Brokerage accounts provide the ultimate flexibility. In a 401(k) you’re typically bound to just mutual or index funds. This is great for most people, but there are a lot of other investment options out there. The biggest benefit in a brokerage account is being able to take advantage of Exchange Traded Funds, or ETFs, check out etf vs mutual fund to see the difference between the two. With thousands to choose from, low expenses, and no investment minimums since they trade like stocks, these can be an attractive investment vehicle for a retirement account. Not only that, but with a brokerage account you can buy individual stocks, mutual funds, individual bonds, and in many cases, even things like options and CDs. So, if ultimate flexibility is what you’re looking for, a brokerage IRA is going to provide it.
Cons: Even though there are many great benefits with this option, there are obviously going to be some drawbacks as well — the biggest being cost. Unlike investing in most mutual funds that just have a built in expense ratio, with a brokerage account you’re going to be charged a fee each time you place a trade with most brokers. And if you trade an ETF, you’re also dealing with recurring expenses built into the fund on top of the trade commission. Also, some brokers will charge a transaction fee to place a mutual fund trade that you otherwise wouldn’t have inside a 401(k) or if you had an account directly with the fund company. The good news is that you can eliminate most of these fees by opening a brokerage IRA with a free or discount broker such as TradeKing, check out my TradeKing Review for more details.
Rollover Into a Mutual Fund Company IRA
The third main option for rolling over your 401(k) is to roll it directly into an IRA held at a mutual fund company. Popular fund companies include TD Ameritrade, Vanguard, Fidelity, T. Rowe Price, and so on.
Pros: Rolling directly to a fund company will typically be the cheapest way to invest in their funds. There are no commissions, and in most cases, no account fees if you meet some basic requirements. It can also be helpful to stick with one provider so it’s easier to keep track of your investments.
Cons: If flexibility is what you’re after, this may not be your best option. For one, you’re basically tied to this fund company’s offerings. While most fund companies will have plenty of options to satisfy most investors, if you want to dabble in individual stocks, ETFs and so on, you’ll more than likely need to then open a separate account with a brokerage to do this. In addition, you have investment minimums to contend with. All fund companies are different, but most require that you have anywhere between $500 and $3,000 to invest in a single fund before you can buy any shares. For smaller accounts, this might mean being unable to invest anything, or only buy one fund until you save up more money to invest in another.
Your Rollover Step-by-Step
So, you’ve decided that you’re going to do your retirement savings a favor and roll over your 401(k), but where do you get started? Don’t let the process intimidate you. Sure, there may be some complicated looking forms to fill out and it might mean that you’re dealing with your life savings, but it isn’t hard if you know the steps involved.
1. Check Rollover Eligibility With Your Old 401(k) Provider
Before you do anything, check with your old provider. You want to make sure there won’t be any unexpected snags or fees and make sure that you’re showing up as a terminated employee. They can’t release the funds unless you’re terminated, and I’ve often seen cases where your employer doesn’t notify the plan provider, and you’re still flagged as an active employee in the system. Then when you try to do the rollover, it doesn’t go through, you’re not often told why, and it is up to you to make the contacts to get that resolved. So, save yourself some time and make sure you are cleared to move the money and that there are no unexpected penalties, fees, or restrictions.
2. Obtain Rollover Forms From Old Provider
If you’re already on the phone with the old provider checking to make sure you are free to move the money, you can also use this time to ask for the required paperwork. In most cases, you will need to submit paper forms in order to initiate a rollover, so you’ll want to tell them that you intend to roll the money over, and that you want the forms needed. They will either send them to you in the mail, or you may be able to request them via email or by fax. There are some providers that will only require a rollover request form from your new plan, and if that is the case, simply move on to step 3.
3. See What is Needed for the New Provider
Next, you’ll want to check with your new account provider to see what they require in order to accept the rollover. Whether it’s a new 401(k), brokerage account, or mutual fund company, each will have their own unique, but similar process. In some cases, you may be required to open up an account first, and then submit a rollover form. In other cases, the account creation and subsequent rollover may all be part of the same form or process. Either way, determine how they require it to be done, and make sure you have all of the appropriate information from the previous provider to complete everything.
4. Complete the Forms Properly
This is an important step, especially if you’re doing it on your own. All of these forms may have a lot of information, and to make sure things go as smoothly as possible, you’ll want to make sure you fill it out correctly. For instance, if your rollover form from your previous carrier asks what type of distribution this is, you want to be sure to choose a Direct Rollover. This ensures that the funds are made payable to, and go directly to the new account. This often requires information as to how to make out the check or where to wire the money. This is information that you’d need to obtain from the new provider.
If you have questions at this stage, call the company and ask for help. Whether it’s questions with your outgoing provider or incoming, don’t assume and just fill it out the best you can. Sometimes just an unchecked check box, or an overlooked signature can kick the forms back and delay the process for weeks. In the worst situations, you aren’t even informed there is a problem and it can drag this process out forever. So, save yourself some trouble and make a quick call if you have questions.
5. Submitting the Forms and Follow-up
Once completed, it’s time to submit the forms. Whether it’s forms for both providers or just the new one, you’ll need to mail or fax them to the appropriate location. But your job doesn’t stop there. You need to stay on top of this process. There is a nasty habit of outgoing providers to make it difficult for people to pull their money out. If something is wrong with one of the forms, or they never receive anything, you aren’t always going to get a call or letter right away alerting you. They don’t want to see those funds leave, so they aren’t going to be quick to tell you something that will speed that up. So it’s up to you to follow up on your own in most cases. If you haven’t received your check, or the funds haven’t been deposited after about two weeks, I’d make a few calls and make sure all parties received the appropriate paperwork and that they are in good order. If not, you may need to have them send the forms back so you can correct the error, or simply provide some information over the phone. Either way, don’t assume that everything is going smoothly behind the scenes if you don’t hear anything.
In many cases, you will receive a check for the full amount of the rollover in the mail. It is then up to you to make the deposit into the new account. Make sure the check is made out properly, and submit it for deposit with any required deposit forms. If you previously called and they said a check has already been issued and mailed, keep an eye out for it. Again, you want to be on top of things if it doesn’t show up so that you can have a stop issued on the check and a new one sent. And don’t hang on to the check once you receive it. Get it deposited as soon as possible and out of your hands so that you don’t forget about it, it gets lost, etc.
Making the Right Choice
As you can see, there are many different options available to you when it’s time to do a rollover. There isn’t a right or wrong answer, as each method has its own pros and cons. So, don’t become paralyzed by the choices or process, because the worst thing you can do is withdraw the money unnecessarily. Obviously, there may be some financial emergencies that may dictate a rollover isn’t the best course of action, but for most people, this will go a long way in helping you achieve your retirement goals.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.
I recently left my job and have about 20,000 in my 401k. My new company has a 403b plan. I want to roll into this new plan, but when I contacted my old employers investment company they told me I need to fill out the forms myself...ok fine, no problem. Then I was told that my husband needs to sign a portion of the document in front of a notary. When I asked why I was told it was because it would be his money someday. Weird policy I thought, since he isn't even listed as the official beneficiary. Then I was also told that I had to seek out the owner of the company where I worked and have him sign off on it. I am 100% vested and my exit paperwork was sent it, so I guess I am questioning why I have to personally seek out this man and have him sign my paperwork. Shouldn't the investment company handle that? I am not friends with the owner of the company and don't have a way to connect with him to have this paper signed.
My husband's previous HR person apparently filled out the forms incorrectly (he was going to roll his 401k into an IRA) and now we are sitting with a check with taxes pulled out. We do not have the cash to follow other advise of replacing the withheld money to receive tax credit next year. No one is really taking responsibility? Action to take?
My company has filed bankruptcy, I have a super nice 401K. Can I rollover my 401K to my husband's work company's 401K account. Thank you
I have a friend who has become terminally ill. Can he withdrawl his 401k if he is still employed by his company? The company has put him on medical leave of absence, so that he can still recieve medical benefits. He thought he would have to leave his job, inorder to withdrawl his 401k funds.
Thank you, Jeremy Vohwinkle! This is my third attempt to figure out how to do a rollover, and now I have steps!
I recently quit my job to go into my own business as a realtor. What are my options for my 401K with my former employer?
My son has lost his job in Buffalo NY.... He has a 401 K plan which his employer added to also... Now they are leaving NY and going to Canada so my son cannot go... Now he is only 54-1/2 and pretty broke as so many in the younger gereration that never really saved for a rainy day........ He was told that his employer can take the money back, that they distributed along with his if he takes any out,.... Now I know he will owe a penalty to IRS because he is not 59-1/2, but can the employer take what they c ontributed back?????? He needs some money.......... Which way should he go?????
The hardest part I've found is the "Complete the forms properly" since they make it so complicated. At least it was for me when I went through one a few years ago. It's so important though to not forget about it. I once had a coworker who left his 401k when he quit his last job, which was like 7 years ago, and was only now trying to consolidate everything. He ran into a lot of headaches!
I'm blown away by the number of people that do none of the above and just cash it out. and spend it. I work with a guy who did this a few years back. Crazy.
I've been admitted to medical school, with a projected yearly income afterward of +$250k. My wife has $17k in an employer-matched 401k, and will be leaving her job soon. We will mostly live off loans during school. Can you offer any insight on this common plight? We are 32 and 33, respectively.
Its really good informative post. i do not know most of the thinks .thanks .I also face the problem at the time of when i change my previous company .
I have a $15K 401K loan balance against my former employer's 401K plan. The 15K balance is going to be forcibly paid off on May 17, 2012 -- 90 days after my last day of employment. I want to avoid the 2012 taxes & penalties that will occur when the payoff event occurs.
I left my job recently. I have 29k in a 401 and 15k in a pension. I am 53. Where can I put the money to work at my advantage.
I am unemployed but have about $10000 in a 401k from my last employer whom I was laid off last year.I would like to take all this money out and stop any future activity on the account or at least take some cash out just to survive.They have told me I cant and have to wait 5 years to do anything .Any options how I can get some cash from this or do I have to wait out the years
I am rolling over my 401k from my previos employer to my new employer 401k plan. My old provider says it takes 30 days to do this due to IRS Regulations? IS this true??? I would understand that if I was taking the money out and spending it but its a rollover.
Hello, I am really new to this 401k, but I recently quit my job and I have 5k usd on my 401k, my new job does not offer it yet until a year of employment, any advice you could give me on my options please thank you
Hi i recently have left a company and now am being told that to cash out my 401k I will be charged a processing fee of $100 to process the check although its my own money ... is this even legal? On top of that i was told it would take 60days before they can even distribute the funds to me and that's never happened to me before not sure if that is a new law or not as I have quit about 2 weeks ago. Also on another note the company initially told us that they were going to stop using principal and change to the contractors plan. At that time I asked if I could remain with principal and was told I could although the company wouldn't be part of it. Now they're saying they never said that and I only found out because recently I received a quarterly statement that my account balance was zero and when I asked my company why that was their answer was we transferred everyone's money from that 401k to the current 401k plan. I spoke to them and said I never signed anything that would of allowed them to transfer that money and they said well no one did we just transferred it because we are no longer a part of that company. Is that legal for them to do that? I was participating in the new plan but expected my money to stay with principal and now I'm having trouble cashing out my money. I don't know what I should do now because everything already been done for a few months and I'm not a tax or CPA attorney.
My company was taken over by another company and we were given a new 401k. Our old 401k has been frozen for 18 months and the new company are not giving us any reason why it is frozen and not rolled over. Is this legal?
About the "cons" in the "Rollover Into a Mutual Fund Company IRA".
I don't think ANY of those are true when doing a rollover to Vanguard. Yes, their funds do have minimums, but they are reasonable and if your 401(k) doesn't have enough to meet the minimums then we are talking too little money to worry about anyway. If you really do have a small amount, it van all be put in a single balanced fund. This is one of the best options anyway.
Vanguard does provide a brokerage service so you can buy anything available on the open market and their fees are among the lowest available.
I have a $15K 401K loan balance against my former employer's 401K plan. The 15K balance is going to be forcibly paid off on May 17, 2012 -- 90 days after my last day of employment. I want to avoid the 2012 taxes & penalties that will occur when the payoff event occurs. How can I avoid that? What are my options?
Thanks for any advice.
Is it easy to roll over a 401k to a Roth? If I no longer work at company with a 401k plan do I have to roll it over? (retired)
I'm going rollover and old 401K into a on-line brokerage account and manage it myself. I've researched investments strategies and will likely use IBD's CANSLIM. My question is whether there are any tax issues or mistakes to avoid in rolling it over and trading stock myself?
I am 53 and had to take an early distribution for financial reasons from my previous employer profit sharing program. I would like to rollover (within the sixty day time period) a percentage of it into a IRA or such to defer the income, taxes, and penalties under next year (when I will need to take an early distribution of it then). Can I do this or is there a time period that I will have to leave it in the IRA? Thank you.
Mother in Law is 63 and quit her second full time job and has $5000 in 401 k fund. what is her best option? Cash out, she is over 59 1/2? Her annaul income is less then 40000. How much tax and pentalty would she have? What would her benefit be if she rolled it into another IRA?
Don't forget those of us GenX'ers who are facing or dealing with reality of divorce! QDRO's are a main asset for many of us, and there is VERY little help out there!
This is a HUGE transaction and lots of the regular 401k rules are different
What is the special emergency situation that the president promises that you could withdraw 25% of your retirement without being penalized?
My husband became disabled and recently resigned from his job after getting Social Security/Disability. I have been diagnosed with a terminal disease and we were wondering if once we rollover his 401K plan to an IRA can we take a distribution without penalty for medical costs? We are both under age 59 1/2. Thank you.
I left employment with a company in 2004. At that time I decided to keep my 401k money in their account since I didn't have 401k at my new job yet. I still have an account with the old company (managed by Diversified Investment), but now, almost 6 years later I'd like to just rollover into my current employer's account (managed by ING).
Can I do that now, even though I haven't recently left employment? Or has my window of opportunity to rollover passed?
My wife has been out of work due to medical reasons for about 7 months. She is 60 yrs old and its still up in the air weather she will be able to go back to work.
Her 401k contributions of course have been stopped as well as the match from the company. So her money is just sitting there with no match or weekly contributions. Should / can my wife roll her existing funds out of the 401k to a IRA or other option even though the company hasn't let her go? And if she can do this and is finally released from the Dr to come back to work, can she start a new 401k? I know it sounds crazy but there are no stupid questions...right?
My husband was terminated way back in 2001 and we just came across his paperwork to have his 401(k) cashed out or rolled over, but his previous employer is now saying that he had a timeline and that his 401(k) was probably invested in the other employees accounts? As you can tell, I don't know anything about 401(k) plans...is it legal for them just to absorb his money without having him sign something? HELP!
I used to work for the US government until I decided to quit my day job 3 years ago to venture into business. I decided to keep my money there as it was one of the options. Recently I am contemplating whether I should roll over my account to my stock broker for more flexibility. My TSP is doing good but it does not have more options to choose from. I would like to try to do a direct transfer to an ETF type IRA account.
I work for a co. That has a 401k but I didn't join up but they started holding out on their own is their anything that can be done about them doing this
What is the difference between IRA AND IRRA? I have just rollover my 401K account to Merry Lynch (because I lost my job, and the only option I had was to take my money out or rollover to IRA). The account is opened under IRRA (Individual Rollover Retirement Account). I went to my local library to find more about this type of account, and the librarian couldn't find anything under IRRA.
Once you have been laid off, it is important to speak to a professional about your 401K options because of taxes, penalties, and other fees that most people are not aware of. I personally work in the finance industry and see many clients who have the same questions.
I am being let go fro mmy jon 10/1 I have 35 K in a JP Morgan account ( 401) I'm being told I can not take a partila distribution. Rather than pull it out I was told I can roll over to IRA ( can I roll it over to a Brokerage account ?) When the check it sent to the IRA I can ask for a distribution. is this corrrect. Not the whole amount just a percentage.
I am 73 as of 6/26. I was laid off in February 2010. I rolled my 401K into a Rollover IRA in June. I have taken no distributions from either account. I know I am now subject to MRD rules, but since I did not take a distribution by 4/1 am I now in trouble with the IRS? When should I take my first and second MRDs?
I also have not heard of a fee to rollover a 401(k) into an IRA, but these days, it seems there are fees for everything. Is it related to a minimum balance, or just a $100 fee? I am curious to know who the financial company is also. You can e-mail me directly at my website if you don't wish to post it publicly. Sorry for your inconvenience. I disagree strongly with the idea of a 'rollover fee'.
I wish I read this before I enrolled in the company 401K. Not only did they stop the match but ewhen I left the company and rolled over the 401K into an IRA the financial company charge a $100 fee! Apparently it is in the contract.
I will read the future 401K contract thoroughly before I sign up. I've moved three 401Ks in my career and never have I been charged a fee. Having said that, from my experience with the financial company I shouldn't be surprised.
People often use their retirement funds like a checking account. This habit is not proper future planning. By the time one reaches retirement age, he or she has about $10K per year to live off of. An unfortunate reality is that more and more seniors are living below the poverty line. Decades ago people used to save, on average, over 12% of their income. Now the average is negative 1%. We must educate ourselves and be prepared to make well informed decisions.
Thanks for your question. That doesn't sound typical on the part of Fidelity as a 401(k) Sponsor. Normally, when someone takes out a loan, the loan automatically becomes a withdrawal upon leaving the employer, and is subject to all taxes and penalties.
In other words, if you had $10,000 remaining in your 401(k) after the loan, that amount would be used to repay the loan balance.
That solves the loan problem, but creates another one. Your 401(k) account which had been $20,000 would now be close to nothing. If you don't have a job yet, there are a lot of things you can do to create income. Lawncare, pizza delivery, handyman repairs, etc. Think of skills you have and use those to get some cash flow going. That may sound obvious, but it is also true.
As far as your job search, contact local employment agencies to help with your resume, also try networking with sites like Facebook, and Linked In. There are jobs available, and they go to the people who do a great job of networking and marketing themselves.
I hope I was able to help a little, Sam. Thanks for your question. Feel free to contact me at the website if I can help further.
About a year ago things at work really slowed down so while I was still employed I took a loan out of my 401K accout to pay off my truck in the case that I was laid off. Now a year later I was laid-off again in April and they do not plan on bringing me back. I received a letter from Fidelity talking about my loan going into default now. I am 31 years old, had 20K in my account, took 10K out to pay off my vehicle and have an outstanding loan balance of $8,500. I still do not have a job and don't have the 8,500 sitting around to re-pay the loan. Any ideas on what I could do since I still don't have a job? Thank You.
Good call on putting the money into an IRA.
Regarding your question, the answer is Yes, you will be taxed at your normal rate and penalized an extra 10% if you are under 59 1/2.
Let's say you had $10,000 in the 401(k) and you are rolling it into an IRA. You want to take $1000 out. The $1000 will be taxed and penalized accordingly. Since you already have the check, you will most likely need to show what your IRA rollover deposit actually was. The records for this example would show a $10,000 check paid to you and $9000 deposited into the IRA. So your taxes would need to account for the other $1000. This would be counted as ordinary income.
I hope that helps.
Hi-I had a question.. my employer terminated our 401k's at our company about six months. I finally got the distrubition check for my 401k amount made out to my bank. I am putting that money into an IRA today.
Can I take out let's say a small amount of money from it before it gets transferred into an IRA? Do I get penalized in this process? Right now-it's not invested in anything per se.
I will attempt to answer here.
1. If you are talking about a 401(k) contribution, that money should have gone pre-tax into the 401(k). You won't need to file it seperately on a 1040. If you are talking about a Traditional IRA contribution AFTER you rolled the 401(k) over, then the IRA contribution would be listed on your 1040.
2. The max contribution to an IRA is $5000. You and your spouse can each put in $5000. If you or your spouse are over age 50, you can add $1000 as a catch up, which means your max would be $6000 total.
3. When you roll over the 401(k) it becomes a Traditional IRA. You are taking the money from an employer plan and putting it into your own plan. The Traditional IRA is tax-deferred just like the 401(k).
The Roth IRA is not tax-deferred. However it is not taxed when you take money out. You can change your IRA into a Roth by paying the taxes due on it.
I hope that helps. Contact me with any further questions or if you would like to reserve a copy of my new book, "Help! My 401(k) Has Fallen - And Must Get Up!" which will be available in print shortly.
I rolled over my 401k to T. Rowe Price, which is the third primary option mentioned in the article. My questions are...
1. Is my contribution deductible? If so, should it be listed in Form 1040, line 32?
2. Is the maximum amount equal to $5000? (married file joint)
3. Rollover 401k is not the same as traditional IRA or roth IRA, true or false?
That's all for now. Thank you so much.