Direct 401(k) Rollover
With a direct 401(k) rollover, the money from your previous employer’s 401(k) plan will be sent directly to the new provider without ever being deposited in any of your personal accounts. This is the most common and recommended route. To execute a direct 401(k) rollover, follow the below steps.
- Contact your previous 401(k) plan provider and request that your account is liquidated.
- Request a check for the entire balance made out to your new plan provider for your benefit. The “pay to” line should say “New Plan Provider FBO Your Name.” We’ll discuss why this is important below.
- If the check is sent directly to your new plan provider, your work is done. The money will automatically show up in your new 401(k) within a matter of days.
- If the check is sent to your mailing address, you’ll need to take the final active step of sending the check along to your new 401(k) plan provider. Your new provider will have mailing instructions on their website; if not, you can simply call and ask for instructions.
Indirect 401(k) Rollover
An indirect rollover means your old employer’s 401(k) funds will go to you directly, then you’ll transfer the money to your new 401(k). It’s important to note that if you choose an indirect rollover and do not transfer the entire pre-tax balance to your new 401(k) within a 60-day period, the IRS will view this as a distribution, and you’ll likely face tax consequences. For this reason, it makes sense to choose the direct rollover when possible — don’t touch the money if you can avoid it! However, if you do choose an indirect rollover, you’ll complete the transaction using the steps below.
- Contact your previous plan provider and request that your account is liquidated.
- Request a check made out to you as an individual and have it mailed to your address.
- Deposit the check in your personal bank account.
- Initiate a transfer of the funds to your new 401(k) plan provider.
Why would you transfer a 401(k) to a new job?
As with any financial decision, there are pros and cons of transferring a 401(k) to a new employer. Among the benefits of doing so are:
Simplifies retirement planning.
It’s far easier to manage your retirement accounts when they’re few in number. It’s also administratively easy to deal with only one 401(k) plan provider. Generally, consolidation by transferring a 401(k) to a new job will save you a great deal of time and headache.
Makes future tax planning easier.
Having your 401(k) accounts in one place allows you to easily see all of your employer-plan retirement dollars in one place. This will give you more control and clarity over the potential tax consequences of removing or rolling over money. It will also streamline your meetings with a tax professional.
Potentially lower fees could mean more money in your account.
Many 401(k) plans come with outdated investment menus and in some cases, unexpected fees. Scattered accounts tend to get forgotten — and these forgotten 401(k)s cost more than you think.
Better understand your retirement finances.
If you’re taking the active steps to roll over your retirement account, you’ve spent at least some time thinking about how this might work. Perhaps you’ve even gone far enough to research the mechanics. When it comes to personal finance knowledge, more is always more, so it’s a good idea to learn about these transfers when you have to set one in motion.
Why should you not transfer a 401(k) to a new job?
Aside from the many advantages, there are some disadvantages to consider:
There will be upfront work required to transfer your 401(k) to a new job
You’ll need to do a bit of research before initiating a 401(k) transfer. Reading through both 401(k) plans (your old one and new one) can take a little time to determine which has the better investment options and lower fees. You’ll also need to take the time to call your previous plan provider to set the process in motion.
Your new 401(k) plan may have higher fees than your old one.
In this case, you might not want to move your old plan into one that’s more expensive — and that’s understandable. Ideally, you moved to a new employer with a great 401(k) plan, but that’s not always the case.