HOWTO Do A 401K Rollover Correctly


STEP 1

Open a Traditional IRA account at a broker of your choice.

STEP 2

Once you have your account details, request a 401K Rollover form from your old 401K custodian. By law they have to provide this and the company HR has no say in this (in case you had a bad exit!). There is no expiry date on when you can do a rollover. You can request a rollover whenever you choose once you quit your job

STEP 3

This is a very simple form where you specify what you wish to do with your 401K funds. Choose a Traditional IRA rollover and provide the account info from STEP 2.

STEP 4

One crucial information that you’ll be required to fill out is to the question, whom should the check be made out to. Do not fill in your name! The check should be made out to your new IRA custodian.

So if you were called Guybrush Threepwood and your IRA custodian was Wells Fargo Advisors, you would write:

To: Wells Fargo Advisors (FBF Guybrush Threepwood)

This is called a trustee-to-trustee transfer.

STEP 5

That’s pretty much it! Once the rollover is complete, you should see the funds deposited in your IRA. You are now free to invest!

FAQ

If I do a 401K rollover to an IRA, would that count towards the IRA contribution limit for the current year?

No.

Will there be a fee to do a rollover?

Your old custodian will ding you with a fee. Usually ranges from $40 to $100 which will be taken out of your 401K funds. The new custodian won’t charge you for incoming funds, but might have annual maintenance fees. Check with your custodian.

Can I rollover all my old 401Ks into a single eligible account?

Yes

The company I worked for went belly up. Can I do a rollover?

Yes. Contact your old 401K custodian. Your 401K funds are protected by Employee Retirement Income Security Act (ERISA). Note that, ERISA only protects your funds in case of company bankruptcies, not the value of your funds! If you had all your money invested in Enron, you have no one to blame, but yourself!

Can I do a rollover from my current job’s 401K account?

Usually no. There are special circumstances like a merger, but normally, you can’t. You can do a rollover once your leave your job.

Is there a limit to the number of rollovers I can do?

No, but you can only do 1 rollover within a 12 month period if you do an indirect rollover. Although, no such limitation exists for trustee-to-trustee transfers.

Conclusion

When you leave behind your old job for a better opportunity, in your excitement, don’t forget your 401K! Consolidation will make your life a lot easier. Also, know the difference between a direct and indirect rollover. Always opt for the former. Your old 401K provider may or may not explain the difference, but be aware there are consequences (60 day window and 20% tax withholding) with an indirect rollover.

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33 thoughts on “HOWTO Do A 401K Rollover Correctly

  1. I’ve quit two jobs with 401(k)s. The first time I cashed it out (stupid!). The second time I rolled it over into a traditional IRA. (smart!)

    Luckily (if you can call it that) the first time was a very small amount. I think I got less than $200 out of it.

    • Can’t blame you for cashing it out. In my experience, most 401K custodians don’t explain the tax consequence of cashing the money out.

      Lucky indeed that the amount was small!

  2. Wow, you have created a comprehensive resource here MC. Thanks for laying it all out.

  3. Great post with awesome pictorial steps. I ended up rolling over my 401K into Roth IRA after I left my first company. Turned out to be okay…

  4. Great post! Many people fail to realize that it will cost them 10% penalty and they have to pay their tax rate on the money taken. It is considered ordinary income.

  5. So many people leave the job & their money behind, which is typically a BIG Mistake; cashing it out is even worst (IMHO). The decision of Roth vs traditional IRA in this case depends on other money you have available.

    • Roth vs Traditional will depend upon knowing whether your tax rate will be more or less after retirement.

      But for keeping things simple, I’d say go with Traditional – you can always convert to ROTH at a later time.

  6. Great article MC. This is a great resource that I plan to share with my friends. It’s a simple but very helpful layout that explains the pros and cons to each scenario. Thanks for sharing this.

  7. Another thing to consider is if you have a 401k that is below $5,000 and quit your employer can drop you from the plan.

  8. I haven’t had to do a rollover yet but I have always wondered how it works. I didn’t realize there are that many different ways to do it. Really insightful step by step guide MC! -Sydney

  9. Excellent post on a process that confuses many people. I agree that the preferred approach for many people is to rollover to a traditional IRA where you have control. Then you can invest in low cost index funds and with some discount brokers, commission free funds.
    In some instances it is possible to transfer “in kind” so that funds are transferred and the “out of the market” issue doesn’t arise.

    • True DIY. A lot of what can and cannot be done depends upon the employer and the 401K provider within the framework provided by IRS.

  10. I agree with Hunter. What an awesome resource. There is so much thought and detail that went into this. Great job. Since I live in Canada, a 401 doesn’t apply to my but I definitely know where to point some of my American relatives.

  11. Lots of great information here! I like you you laid it all out in simple terms.

  12. Good post, Money Cone. There are certainly different ways to approach this, and you did a nice job.

    Cashing out is not good, generally speaking. Hard to imagine some people do that, when they’re not in financial distress.

  13. Great job on a comprehensive post! I’ll pick the same choice as well and roll it over to the traditional IRA. I want to put off paying tax as long as I can. :)

  14. Nice resource!! I am in my second job. First job I didn’t even have 401k (yes I was financially very brilliant then ;) ) If I had a 401k I might have probably cashed out. Now I know better, I will roll over the traditional 401k to IRA and the ROTH 401k to ROTH IRA to not pay any extra taxes. My husband’s 401k will be tricky to rollover because it is semi-managed.

    What plugin is that MC? I have been looking for something like this. Is it slidedeck? Pro or regular?

  15. Great post. Here is my confession: I did cash out my 401K once. It was a very small amount and I needed money. Really bad. So, there you have it. The biggest NO NO you listed first, I’ve done it. :)

  16. We roll over every time we switch jobs. Over time, keeping the funds compounding tax free is an awesome way to grow wealth!

  17. good resource to read. I rolled over previous 401(k) consolidation helps.

  18. This is so helpful, MC! I agree about moving to the IRA; the flexibility is so important! Thanks for a great step-by-step tutorial!

  19. MC strikes again! Another terrific resource. Will definitely refer to this when I switch jobs. Thanks!

  20. Good information. I would always roll it over into a Rollover IRA. When you do, make sure that you assign your beneficiaries properly though.

  21. This is one of the best posts I have read about 401K. Since I started investing on my 401K, I have been informed that cashing it out is the most stupid thing to do with it. So far, I have not done anything with it yet but definitely I will roll it over. but not now… not yet.

  22. I’ve had a couple friends leave my firm that ended up cashing out their 401(k)s. They were fully aware of the implications and did so for no other reason than the job switch affording them an excuse/opportunity to do so I suppose. aggghhh!

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