How Do I Rollover My 401(k)?
Are you starting a new job? Leaving an old one? Retiring? One of the first financial decisions you'll face is what to do with your old 401(k). Done right, a rollover moves your savings into a Traditional IRA, Roth IRA, or new employer plan with no tax bill. Done wrong, it can trigger unnecessary withholding, massive tax bills, or missed deadlines.
Direct Rollover vs. 60-Day Rollover
Direct Rollover
The most common way we help clients rollover their 401(k) is through a "Direct Rollover". Your old 401(k) provider sends the money straight to your new IRA or plan. The check is typically made payable to the new custodian "FBO" (for benefit of) you. For example, "Charles Schwab FBO Jane Smith", not "Jane Smith". This is usually the cleanest option and avoids mandatory 20% federal withholding.
If the check is made out to you "Jane Smith" the 401k provider mau have withheld the mandatory 20% federal withholding. Which could equate to $200,000 on a $1 million 401(k) rollover.
Typically, the 401(k) provider mails the check to you, or the receiving firm (in this case Charles Scwhab). If mailed to you, we help our clients make sure the check is made out properly, that it is made out to the right account number (we don't want to upload a Traditional IRA check into a Roth IRA Account), and help them deposit it.
60-Day Rollover
You receive the funds yourself and have 60 days to deposit them into a new retirement account. If your provider withholds 20% for taxes, you'll need to make up that amount out of pocket to roll over the full balance—or owe taxes and possibly penalties on the shortfall.
We strongly encourage a direct rollover, it is almost always simpler and safer.
Why Your Rollover Might Get Delayed
One delay you may experience is more common than you would think: your employer hasn't yet reported your termination to the 401(k) recordkeeper. Until that happens, the plan may not process your distribution request, even though you've officially left the job. If your rollover stalls, ask HR when your termination will be reported to the plan administrator. Prior to doing a rollover, you should call your 401(k) provider to make sure your employer has processed your termination.
Here Are Some Common Rollover Mistakes to Avoid
- Check made payable to you instead of the new custodian
- Termination not yet updated with the plan
- New account doesn't accept the incoming rollover type
- Check sent to the wrong address or deposited into a personal account
- Missing the 60-day deadline on an indirect rollover
- Forgetting to replace withheld funds to roll over the full amount
- An outstanding 401(k) loan complicating the distribution
Advantages of Rolling Over Your 401(k) to an IRA
When rolling over to an IRA, usually you have a very large pool of investment options to choose from. If you use a custodian like Schwab, Fidelity, or Vanguard, you can choose from most of the investable universe including ETFs, Mutual Funds, or individual stocks.
In a 401(k), you can usually only invest in the 15-25 options the 401(k) provider offers. Another pro is the ease of taking a distribution from your IRA. Taking funds from your 401(k) can prove to be a difficult, strict, and lengthy process. You can usually only take money out of a 401(k) under a qualifying event, where in an IRA, you can usually under any circumstance withdraw funds, however taxation and penalties (if under 59 1/2 years old) may apply.
While rolling over to an IRA may seem like a clear winner, your advisor should go through the pros and cons of the rollover before making the recommendation, as there are a lot of decisions to think through and how the rollover may impact your fees or financial plan.
Quick 401(k) FAQs
Is a 401(k) rollover taxable?
No, a properly executed direct rollover between eligible retirement accounts isn't a taxable event.
What's the 20% withholding rule?
If a 401(k) distribution check is made payable to you personally, the plan generally must withhold 20% for federal taxes, even if you plan to roll the money over.
How long do I have to complete a rollover?
If funds are paid to you directly, you generally have 60 days to deposit them into a new retirement account to avoid taxes and penalties.