A 401(k) Rollover Step-by-Step Guide

Have you considered what to do with the 401k at your current job when you are ready to retire or if you leave your job for another? In this article, I want to show you how straightforward it can be to roll over your previous 401k to your own IRA (Individual Retirement Arrangement) or your new employer’s 401k.

The most advantageous reasons to roll your funds into your IRA are lower fees (in most cases), more control, and a more comprehensive array of investment choices. Your workplace retirement plan charges monthly account fees on top of the fees for the underlying investments. Many custodians, like Charles Schwab, offer IRAs with no underlying account fee. You also have more control because you can change your investments at any time, complete other financial planning strategies like a Roth conversion, and manage withdrawals in retirement. Regarding investment choices in an IRA, the world is your oyster. Whereas your 401k may have only a few poor choices, an IRA with a good custodian can hold almost any security available on a US exchange.

For these reasons, in most cases, I like moving old 401k assets into your very own IRA. The main exception is if you’re a high-income earner without an existing IRA balance and are over the income limits for Roth IRA contributions. In this case, we may want to consider other strategies, like leaving the money in your old employer’s plan or rolling the funds into your new employer’s 401k plan. That’s because once you have money in an IRA, it can complicate completing a backdoor Roth contribution. When we have a complete picture of your situation, we can give you the best direction.

Once we decide on the best planning strategy, we want to execute the process with you so that you ensure you don’t create any taxable or penalty-inducing events. Most of the time, we pick a direct rollover, which causes the old 401k administrator to send the funds from your old account to your new account without it passing through your hands. However, some employers have strict rules to follow to distribute your funds, which requires you to do an indirect rollover. That means the old administrator sends a check to you earmarked for your IRA that you must deposit. We will help you execute this right and avoid hiccups or unnecessary withholdings.

Once you've selected the appropriate rollover option, follow these steps to complete the process:

1. Contact the old 401k provider and obtain the appropriate form. Many have their own that you must complete and submit manually. Some offer streamlined electronic means. Also, pay attention to any rollover windows the old administrator has, like a requirement to wait a certain number of days after you leave your job.

   NOTE: You won’t be initiating the rollover yet. You have some other prep work to do first.

2. Observe your latest 401k statement. Pay attention to funds in the account, such as pre-tax, Roth, or post-tax contributions. You must plan for those funds to go into different IRAs if you have multiple buckets.

3. Research potential IRA providers. Find a custodian that meets your needs regarding fees, investment options, and customer service. We custody with Charles Schwab for all our wealth management clients.

4. Open the required accounts. If you have multiple buckets, you might need to open a traditional IRA and a Roth IRA. Open these accounts before you initiate the transfer because you’ll need to supply the account information on the transfer paperwork.

5. Submit the completed paperwork. Complete the paperwork and follow the procedure for your old and new custodians so the rollover process goes smoothly.

6. Watch for the checks. Understand the timeframe each custodian needs to complete their part of the process and follow up with the appropriate party for status.

7. Deposit the rollover checks. Make sure to deposit them using the correct account type if you get more than one check. Maintain your records of the rollover so you can adequately report any tax-related events in the future.

8. Invest the funds. Review your investment strategy and allocate funds in a way that aligns with your retirement goals and risk tolerance.

By following these steps, you can navigate the rollover process with confidence. If you want a partner to walk alongside you, The Dala Group can provide personalized advice tailored to your unique financial situation and long-term objectives. Schedule a call today to share your goals and gain a partner to help you optimize your wealth-building and save time, so you have more of it to enjoy. With careful planning and execution, rolling over your old 401k to an IRA can be trouble-free.