How to Roll Over 401k – Everything You Need to Know! (Should I Rollover My 401k & Advice)

Should I Roll Over My 401k?

You’ve just left a job, either by retirement or moving to a new company, and you are now wondering, should I rollover my 401k? In addition, you may even be wondering how to roll over a 401k. You want to make the most of the money that you and, possibly, your employer have invested towards your retirement, but you aren’t quite sure how to roll over your 401k to get the best benefit with the least tax implication.

A 401k is a retirement account that is offered by an employer, allowing the employee to make contributions that are deducted from paychecks before taxes are taken out. One of the wonderful benefits of a 401k retirement plan is that you can take your assets with you when you leave an employer. Another benefit is that you can continue to save for your retirement tax-deferred. However, if you aren’t careful, there may be a penalty for withdrawing from a 401k.

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What Are My Options?

Let’s first review what some of the common questions are when you first leave a job.

1. Can I withdraw money from my 401k? While it is an option to withdraw money from your 401k, it does come with a steep cost. When you withdraw money from your 401k before the age of 59 1/2, the IRS considers this an early withdrawal and will charge a 10% penalty on top of your regular income taxes. Even if your account only has $1000 saved up, consider whether or not you would pay approximately 30% interest (10% for the penalty plus whatever your current tax bracket is) to borrow $1000. If the answer is no, then it is not a smart option.

2. Can I leave my money where it is? Some employers will allow you to leave your money in their existing 401k plan. Be sure to check with your previous employer to determine if this is an option.

3. Can I rollover my 401k to another plan? Yes, there are a lot of options to rollover an existing 401k. You might consider a rollover of your 401k to an IRA (Individual Retirement Account); either a traditional or Roth or into a new 401k sponsored by your current employer. An IRA is a retirement account that provides specific tax advantages depending on the type of IRA. We will talk more about those later.

Should I Rollover My 401k?

The short answer when someone asks, “Should I rollover my 401k?” is, for most people, “yes.” Rolling over your 401k is usually a better option than leaving it in an existing employer’s plan or taking a withdrawal. While it is always best to consult with a professional financial advisor for 401k advice specific to your situation, Bankrate.com suggests a few times when rolling over a 401k may not make sense.

1. Company-sponsored 401ks offer group buying power that isn’t always available with individual IRAs. When asking how to roll over 401k and deciding first whether or not you should, take into consideration that, if you lose out on this benefit, it may not be an advantage to you to roll it over.

2. IRAs can’t access stable value funds. These funds are often safer and offer a higher return than a money market fund.

3. Your 401k is invested in company stock. If this is the case, there are some extra concerns to be aware of including what tax rate you will be paying if you rollover the funds to an IRA. This will also be something to consider in how to roll over your 401k.

4. While 401ks are protected from lawsuits by the federal government, IRAs are only protected under state laws. Your state may or may not have favorable protection laws that will cover you in the case of a lawsuit against you. Be sure to verify this with an attorney before deciding how to roll over your 401k.

5. The timing of a withdrawal may be a factor when asking, “Should I rollover my 401k?” IRAs only allow withdrawal at the age of 59 1/2 and incur a 10% penalty, in addition to the taxes, whereas 401ks allow penalty-free withdrawals at the age of 55.

Now that you have your options and have a good sense as to whether or not it makes sense for you to roll over a 401k, you can make an informed decision and proceed, if desired, to begin the rollover process.

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How to Roll Over a 401K

You are probably wondering how to roll over a 4o1k to an IRA or other 401k plan now that you’ve decided to move in that direction. It is very important that you take the correct steps in order to avoid paying a penalty for withdrawing from a 401k. If you don’t, the consequences can be severe.

Here are the steps you will want to follow with the help of a professional financial advisor.

1. Gather the information on your existing 401k. The first step in how to rollover your 401k is to know the details. You can use existing statements and employee benefits plan information to help. Here’s some of the information you will need: What kind of plan you currently have, how much you have in your plan now, how much you are currently contributing, and where it is being held.

When preparing a checklist for how to rollover your 401k, be sure to include any rollover paperwork from your current plan administrator as well as things like a drivers license or photo identification, Social Security number, checking account number and routing number for your bank, and employer’s name and address.

2. Decide what you want to roll your 401k over to. The next step to consider in how to rollover a 401k is to decide what to roll it over to. Your options here include your existing employer’s 401k plan, a traditional IRA and/or Roth IRA.
It is most common to rollover your 401k to an employer plan unless you are no longer with a company that offers this type of plan. If your employer matches your contribution, this is likely to be the best option up to the amount matched by your employer.

If you are wondering how to roll over a 401k to an IRA, you have choices. Roth IRAs are contributions made after taxed funds. This means you pay taxes and then invest into the IRA. For this reason, a Roth IRA is usually chosen over a traditional IRA when you expect your tax rate to be the same as or higher in retirement than it is now.

If, however, you expect your tax rate to go down in retirement, then choose a traditional IRA.

3. Make a plan. A key step in how to rollover a 401k is to make a plan in advance. It is important to know what your overall goals are for retirement in order to choose how your assets will be allocated and how to best maximize tax benefits.

You will also need to name a beneficiary who will inherit your IRA should something happen to you. You will need to obtain this individual’s name, Social Security number, and date of birth.

4. Establish a new account. The next step in how to rollover your 401k is to establish a new account. Your investment plan and goals will help you choose the right company to work with. Working with an experienced investing advisor can also help you to consider where you will open your new account. Things like additional fees, ease of use, and what type of account you wish to open will all need to be considered.

Adding to the challenge of how to rollover a 401k to an IRA is deciding on the type of institution you will use.

Full-service brokers include companies like Merrill Lynch, Morgan Stanley Dean Witter, and Edward Jones. Full-service brokers tend to provide personalized services, including 401k advice, retirement planning, and tax tips. They may receive a commission from your portfolio, or they may charge a fee for their services. While you should always do your own due diligence, a full-service broker will be more appropriate if you tend to prefer some guidance and direction and like a high level of customer service.

Discount Brokers, including online brokers, are companies like Charles Schwab, E-Trade.com, and TD Ameritrade. These discount brokerages can set up your portfolio on your behalf but do not provide 401k advice or any other personalized services. Since they do not offer personalized services, the fees are kept low. This option may make sense for you if you are a do-it-yourself, very hands-on type that doesn’t need a lot of guidance or advice.

Be sure to check the institution you choose to see if it has options for helping you with planning and decision-making. Even the discount online companies have a great deal of resources for helping you create a good retirement plan.

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5. Invest your funds. This is where many people make the mistake of having their existing 401k funds sent directly to them instead of to the new account. When you do this, you will incur the same penalty for withdrawing from a 401k as if you were intending to keep the money out of any further investments. It is always best to work with a professional in this regard to make sure that all of the i’s are dotted and t’s are crossed.

When considering how to rollover a 401k, some factors that will determine how your funds are allocated, once invested, will be how close you are to retirement, what your risk tolerance is, if there are any employer matches to consider, and how much you would like to diversify.

Here’s an infographic provided by Charles Schwab that will help to simplify this entire process.

Reverse Rollovers

One more option we haven’t yet discussed is how to rollover an IRA to a 401k. This reverse rollover is sometimes a good move in the following cases:

You have a large 401k relative to your IRA, and you want to manage all of your assets in one place. Consolidating your accounts may make more sense than keeping a small IRA separate.
You want to access the stable value funds only available through 401ks.
You want to protect your retirement from possible creditors or lawsuits, and your state does not offer this protection. Check with an attorney in your state to determine if this is a concern before considering how to rollover an IRA to a 401k.
You are a high-income earner wishing to minimize taxes. An effective rollover from an IRA to a 401k can save you some money at tax time.
You are someone who is still working past the age of 70 1/2 and aren’t ready to begin making the required minimum distributions.

As with how to rollover a 401k to an IRA, there are certain steps to take:

Check with your employer to verify that it accepts rollover money from an IRA.
Follow the procedures set up by the financial institution holding your IRA to request a distribution. Hopefully, you will be able to have the funds distributed directly into your 401k plan and avoid any possible penalty for withdrawing from a 401k.
If you are not able to have the funds distributed directly from the existing IRA institution into the 401k plan, there will be 20% of the total amount withheld to ensure that you reinvest the funds. Deposit the full distribution amount within 60 days to avoid penalties and taxes.
Report the rollover on your tax return using Form 1040 or 1040A.
Finally, if you received the funds directly, you will need to cover the additional 20% to avoid a penalty for withdrawing from a 401k. This amount will be refunded to you or go towards your tax bill.

To sum it up, many factors are at play when you ask, “Should I rollover my 401k?” Some include how close to retirement you may be, what your financial situation is, and what your level of comfort with investing might be. It makes sense, with so many variables, to seek out a professional for 401k advice before making any big changes.

Choosing whether or not to do a 401k rollover and then how to rollover a 401k can be a daunting task. It is important to first know what your options are and then to decide if you should rollover a 401k. Once you know that, following a clear set of steps can help make the process a little easier.

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