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We’ve laid out a step-by-step guide to help you roll over your old 401(k) in five key steps:
October 23, 2023
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We’ve laid out a step-by-step guide to help you roll over your old 401(k) in five key steps:
A “401(k) rollover” is the technical term for transferring money from an old 401(k) account to another retirement account. Most people who roll over their account end up transferring their 401(k) savings or another employer-sponsored retirement plan into a new or existing IRA (individual retirement account). Fortunately, most rollover processes incur no income tax and should go through penalty-free.
First, get together any information you have on your old 401(k). It’s okay if you don’t have a ton, but any details like an old account statement or an off-boarding e-mail from your former HR team can help. 401(k) paperwork can be confusing, so just focus on identifying the following three items:
That’s okay. If you’re doing this on your own, we recommend emailing your former HR contact to begin and just asking them who the 401(k) provider is on the plan. That’s something they should know because the 401(k) provider is chosen by your former employer.
In order to move the money out of your 401(k) account, you’ll first need to have an account opened for that money to move into.
You have two main options:
We’ve written a full guide on the five key differences between 401(k)s and IRAs if you’re trying to understand all of the differences. It’s also helpful to know what happens to your 401(k) when you change jobs.
Ultimately, most people who roll over an old 401(k) do so into an IRA for a few key reasons:
Think of your IRA as helping you do two key tasks:
The good news? Opening an IRA can almost always be done online and should take you less than 10 minutes if you don’t already have one.
Many financial institutions offer IRAs, including brokerage firms, banks, and newer “fintech” companies. In order to pick the best account for you, there are a few things to consider. One important consideration is whether you want to make your own investment decisions, or would you rather have the investment decisions made for you so you can just set it and forget it.
If you want to make your own decisions, then what you’ll want is a self-directed IRA. That allows you to make your own trading decisions and invest in whichever financial securities you’d like.
The key features to compare when choosing among self-directed IRAs include:
If you want the investing decisions made for you then you’ll be best served by an automated IRA, also known as a robo-advisor account. Here you’ll answer a series of questions (known as a “risk-tolerance questionnaire”), and your answers will be used to create a diversified portfolio that suits your personal and financial situation. That portfolio is then rebalanced automatically over time without you having to do any work. It’s a great tool for those who don’t want to spend much time managing their investments.
The key features to compare when choosing an automated account include:
During the process of opening your new account, you may get asked which type of IRA you’d like to open. You might see the following options: Rollover IRA, Traditional IRA, or Roth IRA. Here’s how to pick the right one:
You’re making great progress. You know where your 401(k) is and you have an IRA to transfer your retirement savings into. The next step is to initiate your rollover by contacting your 401(k) provider.
Often, the easiest way to do this is by phone. Your 401(k) provider’s phone number should be visible on an old account statement.
In order for your call to go smoothly, follow these tips:
Then place the call. Be prepared for a little hold time but in our experience, the entire call should take no longer than 30 minutes.
After your identity is verified, you’ll be able to tell the customer service representative that you want to do a direct rollover. A direct rollover is where your funds are directly transferred to your new IRA provider. It often means the check is made out in the name of that IRA provider but “for the benefit of ” (FBO) you. This is generally the simplest approach. Your 401(k) provider will usually ask you for the name and mailing address of your new IRA provider and your new IRA account number. We also recommend that you take this opportunity to update your mailing address since they may have an old address for you. That’s because you’ll be sent additional documents, including a tax-related document known as a 1099-R that tells the IRS you’re doing a tax-free rollover.
An indirect rollover is where funds are first transferred to you, or a check is made out in your name. You deposit the funds in one of your own accounts, but then you have 60 days to send that money to your IRA account if you want the rollover to be tax-free. This can create a little extra work for you which is why most people opt for a direct rollover.
Chances are that by this stage you’re done, and your 401(k) provider has initiated the process of rolling over your 401(k) into your new IRA. If so, congrats on getting to the finish line!
But there can sometimes be a small extra step at this stage. That’s because some 401(k) providers will only distribute your 401(k) funds to you, not to your new IRA provider. If that’s the case then they’ll send a check with your money to your mailing address. It’s then up to you to forward that check to your new IRA provider using the mailing details that you’d previously looked up.
You should forward the check you get right away. Even if the check is made out to your IRA provider (and thus not an “indirect rollover”), you should try to do it within 60 days of receiving it. This helps make the transfer free of any tax implications or early withdrawal penalties (also known as “cashing out”).
This unfortunately does happen every once in a while, but don’t worry — your money hasn’t disappeared. If your check doesn’t arrive, then you’ll have to call your 401(k) provider again and ask them to issue a new one.
They’ll place a stop on the first one, and nobody will be able to cash the first (lost) check since it’s generally made out to you or your IRA provider and will always stipulate that it’s “for the benefit of” or FBO, your name.
Remember there are two goals of rolling over an old 401(k) into an IRA — the first is to consolidate your 401(k) assets, and the second is to grow those assets by developing an investment allocation and, hopefully, increasing your account balance over time.
Your very last step in executing a rollover is to make sure that the second goal is being met and that the funds in your IRA are being appropriately invested. If you chose an automated IRA then this should happen automatically. That’s because as soon as your funds arrive they’ll be allocated into a portfolio that was created for you during the sign-up process for your new IRA account. You should still log in and check to make sure that’s the case, but usually, there’s nothing more for you to do.
If you choose a self-directed account then you’ll have to invest the money yourself. Often the simplest option is to purchase a target-date retirement fund — this is an investment vehicle that puts your money into a combination of higher-risk, higher-return stocks and lower-risk, lower-return bonds. The exact mix changes as you age so that you have more stocks when you’re younger and less as you get older: because stocks generate higher returns but are more volatile we should own more of them early on when we can withstand their fluctuations in order to achieve their higher long-term returns.
Otherwise, you can assemble a portfolio on your own by making trades.
401(k) rollovers are a great way for you to transfer your retirement savings without any tax consequences. If you roll over into an IRA, you may also be able to invest in a wider range of assets.
The process can seem a little daunting, but there are just five key steps to follow. Most people who complete a rollover are glad they did. The assets in accounts like your IRA will probably end up being your biggest source of financial support when you retire. Investing a little time to get those assets set up and working for you in the right way can really pay off.
Yes — that’s where Capitalize comes in!
We’ve made it our mission to make this process easier for everyone. If you choose to do a 401(k)-to-IRA rollover, we can handle the entire process for you. Most of the process can be done online and our rollover experts will guide you through any of the manual parts.
It’s 100% free to you (we make money if you choose to open a new IRA).
For those who want extra credit: you may have heard of the term “Roth conversion”. That’s when somebody rolls over a traditional 401(k) into a Roth IRA. Why would somebody do this? It all comes down to taxes. Recall that with a traditional 401(k) your contributions are made pre-tax. When you roll over a traditional 401(k) into a traditional IRA, your assets continue to grow with no taxes being paid — until you start withdrawing your money, usually at the time of retirement. At that point, you’ll pay income taxes at whatever your rate will be then. If you believe your income tax at retirement will be greater than your income tax today, then it might make sense to consider a Roth conversion. This allows you to pay income taxes on your rollover amount today. Then, the money in your Roth IRA grows and can be withdrawn tax-free.
If you’re having trouble deciding on a Roth conversion, consult a qualified tax advisor or qualified financial advisor.
If you’re looking for a provider-specific rollover guide, we’ve put together the following resources:
CEO, Capitalize
