How to Rollover your 401(k) in 5 Easy Steps
In simple terms, rolling over 401(k) is transferring one’s retirement account money to a new Individual Retirement Account (IRA) or a new plan. People usually do this while moving to a new employer. The State allows you to rollover your 401(k) only once in every 12 months.
Usually, when you leave a company, your old sponsor is likely to give you three options for your 401(k):
- Cashing it out (a 10% early withdrawal penalty will be deducted)
- Continue with the same sponsor
- Rollover to a new sponsor or plan
5 Easy steps to Rollover your 401(k)
- Make a conscious decision about how you want to go about your 401(k)
- Identify the new IRA plan
- Complete all paperwork with the former sponsor
- Induction with the new plan and transfer of funds
- Follow up until the new sponsor reflects in your record
1. Make a conscious decision about how you want to go about your 401(k)
A recent study reveals that an American citizen, on an average, makes 11 job switches through his or her life. Now, imagine having 11 different 401(k) plans with 11 different sponsors. Keeping track of multiple accounts can become a rather tedious process.
Consolidating all your 401(k) in one single plan not only eliminates all extra dues like management fee, but also helps you keep a track of your retirement accounts in a better manner. One point of contact is always better than multiple.
Rolling over 401(k) in itself has to be a well thought of decision that you make based on how much a fee hike you are getting. According to the Labor Department, a mere increase of 1% fee could result in reducing one’s retirement account balance to about 28%. Therefore, one must be careful while dealing with 401(k) matters. It is a good idea to seek professional help in such cases.
2. Identify the new IRA plan
It is a given that one of the most important steps of the entire process is choosing the new plan. This step would involve understanding, researching and finalizing the new plan where you want to roll over your 401(k). There are a number of factors one must consider while identifying the best plan- years left to retire, raise percentage, risk appetite, etc.
Usually, people switching from one corporate job to another simply shift to the new employer-based plan. But if you are someone who does not want to do that, then you can consider IRAs. You also need to decide where you want to invest those funds- investments, mutual funds, individual stock, annuities, etc.
3. Complete all paperwork with the former sponsor
You must inform your old sponsor about your choice and then carry out the formalities accordingly. With regards to rolling over your 401(k), you will be asked to fill out a few forms. These are mostly e-forms and don’t require you to be physically present at their office. Collect all the information about your account, including account numbers, as all of these will be needed by your new sponsor.
4. Induction with the new plan and transfer of funds
After finalizing your new plan and completing the formalities of the former sponsor’s plan, it is now time to ensure that the documentation and induction into the new plan happen seamlessly. The new plan induction will require a number of documents from your end including Fidelity (NYSE: FNF), account number, T.Rowe Price (NASDAQ: TROW), and ING (NYSE: ING).
Here are a few tips that will help you to be smart with taxes while rolling over 401(k):
- Traditional vs Roth IRA: If you opt for traditional IRA, your funds will be rolled over without any tax deduction. On the other hand, if you opt for Roth IRA, the rolled amount will be taxed.
- Go for a direct rollover: You can get the amount transferred directly to your new IRA account by getting a check on its name rather than on your name personally. While you are completing the paperwork with the former sponsor, you can ask for this direct rollover there and then!
It is important to be extra cautious while filling these forms as accuracy is the key here. Be sure of the credentials and the figures you are entering; ask your sponsor’s representative for help if you are unsure about any particular column of the induction form. Once completed, you need to submit a hard copy of this form either in person or by fax.
5. Follow up until the new sponsor reflects in your record
Once you have submitted the induction form to the new sponsor, you will have to be alert and active in following up. Allow the process two weeks’ time and if you still don’t see the funds transferred, then you must check with both – the former and the new sponsor for any discrepancies and ask for the reason of delay. Always keep a copy of all the documents and forms you have filled so that they can come in handy.
To sum it up
The process for rolling over 401(k) is one of the most important processes everyone goes through at some or the other point in their life. It is also a way to secure the road towards retirement.
Want to be sure of your retirement planning choices? You can approach financial advisors for help. They can help you choose the easiest path to a secure post-retired life.