How to Roll Over Your 401k


Congratulations! You’ve secured a new job, and you’re preparing for a brand new adventure ahead. As your journey begins, you may need to learn a few things about how to maximize your benefits, including how to roll over your 401k. This quick guide fills you in on the basics.

Learn All You Can

Before handling anything complicated, it helps to know the ins and outs of 401k plans. Understanding this type of financial plan comes down to understanding a few main points:

The amount you’re allowed to contribute every year (2019 cap set by the IRS at $19,000) Investment options: Mutual funds, stocks, bonds and index fund options available to you Restrictions on how and when you can withdraw your money (e.g., withdrawal before age 59 1/2 has a 10 percent penalty and tax withholdings of up to 20 percent) Requirement for 401k withdrawal at age 70 1/2

Research Rollover Options for 401k

After you learn the details of setting up a 401k, you need to figure out how to manage it. The rules on 401k investments give you several options:

Leave an existing 401k alone: If you have a 401k with a former employer, you may be able to leave the money where it is, but you won’t receive matching contributions any longer and may have limited investment options. Additionally, the fees might be higher than those on your new employer’s plan.Roll it into a new 401k: If your new employer offers a 401k plan, you can roll your money over into the new plan. This is a good option if you like the new plan’s investment options and features better than your old one. It also allows you to keep your retirement investments in one spot.Rollover into an IRA: You could also switch your money into a traditional, tax-deferred IRA. Alternatively, you can roll it into a Roth IRA, which lets your money grow tax free.

Open an IRA or 401k Account

Unless you’re leaving your money where it is, you have to open an account before you can act on rollover options for a 401k. If you’re transferring money into a new employer 401k plan, the transition is simple, but if you’re rolling it into an IRA, you have to choose your IRA provider first. Hands-off investors should look for an automated investment management service. If you prefer taking an active role in your IRA investments, look for an online broker that allows you to buy and sell investments with minimal costs.

Request a Direct Rollover

The simplest way to initiate your rollover is to call your current provider and ask them to initiate a direct rollover. The previous provider writes a check directly to your new plan or IRA account — not to you. This is critical to avoid owing taxes. Indirect rollovers pay the money to you after withholding the 20 percent mandatory taxes. You have 60 days to move the money into a new retirement account, but then you have additional tax reporting requirements and may have to pay a 10 percent penalty.

Choose Your New Investments

Whether the money goes into your new 401k plan or an IRA, it comes in as cash, and you need to decide on the investments you want to make. Work with your new fund manager or set it up yourself by opening a brokerage window, which lets you invest in a variety of bonds, mutual funds and stocks. If that’s not an option, choose an index fund. Most S&P 500 options provide an average return of five to seven percent over 25 years.