The “How-To” for a 401(k) Rollover

What is a 401(k) rollover? Simply put, it’s when someone moves money from one retirement plan to another. I often field questions about rollovers from people who are in transition. For example, they're moving to a new job and want to bring their retirement savings with them to the new employer's retirement plan. When people come to me, they usually want to understand what the whole process entails, and whether or not this is a good move for them.

So, why do a 401(k) rollover? As we change jobs, we tend to leave retirement accounts trailing behind us like a string of boxcars behind a railroad engine, and managing all those accounts can get confusing and time consuming. Those accounts, unlike a string of boxcars, might not all be going in the same direction and might be managed with widely different investment strategies that just don’t complement each other or work together. By transferring your money into another retirement account, you can avoid the taxes and penalties, and you can make sure your money is invested and working for you in one consolidated strategy.

Also, with smaller balances there is a chance your former employer will conduct a “force out.” This is a process in which you will either be sent the balance from the account directly, or your retirement dollars will be placed into an IRA. While it might not sound bad to have that balance sent directly to you, it can actually be very costly. The IRS views dollars deposited into your non-retirement accounts as early withdraws and subjects your savings to taxes and penalty fees unless you turn around and put it into a retirement account within 60 days. The taxes and penalties can add up and take anywhere from 10% to 50% of your total balance. Therefore, for the benefit of your future self in retirement, moving that money as quickly as possible into a retirement account is vital. Moving your money in a force out scenario is very similar to a rollover and I'll review how to do a 401(k) rollover below.

Let’s take a look at the four steps of a 401(k) rollover and what you can do to make it as smooth as possible.

Step 1: Gather information about your retirement accounts.

Start by gathering documentation about both your old 401(k) plan and your new one. Here’s what you’ll need:

  • Details about how the money will make it to your new account: How will the money from your existing plan get into your new account? Before calling your former 401(k) company, make sure you talk to your new plan’s administrator. They’ll tell you if your new plan must be funded by an indirect rollover, which requires you to receive a check from your previous provider and put that money into the new account, or a direct rollover, which is an easier process where your previous 401(k) company sends the assets directly to your new 401(k) company. More on both of those later.
  • Information about your old 401(k) plan: The process of initiating a rollover can vary depending on what your existing plan looks like, so make sure you have your plan name, which should be on your statements, and your former employer’s name. Also get the proper phone number to call your previous provider and begin the process.

Step 2: Pay attention to 401(k) rollover deadlines.

Once you get your hands on the correct form, either via email or the postal service, it’s time to fill it out. In many cases, these forms have an expiration date which is an important detail to track. Review the documents immediately so you can reach back out to your new 401(k) company (or to your HR department) and get everything you’ll need from them to complete the form.

Once the form is complete, read through the requirements on who needs to sign so the paperwork will flow without a hitch. You will sometimes need to get signatures from your spouse or partner, and likely from your former employer. I’ve seen people refuse to follow through with this because they don’t want to talk to their former employer, but don’t let a requirement like this hold you back from moving your money.

Also, leave room in your schedule to get your form certified if necessary. Some companies will require a notary, which you can find at a local bank, government center, or even a UPS store. This website will help you find a registered notary in your local area. You may alternately need to get your signature guaranteed. A signature guarantee is something like a notarization that is given by financial institutions (like banks, brokers, or credit unions), in which the institution financially takes responsibility to guarantee you are who you say you are, and that you’re legally able to sign a document.

Step 3: Follow up with your prior 401(k) provider.

After you submit your paperwork, you can’t sit back and wait for your former provider to reach out. Give them a call a few days later to confirm they received everything, and that all the paperwork was filled out correctly. Sometimes they’ll tell you they still haven’t received it, or that it’s in processing. That’s okay; it just means you’ll need to call back again.

Once paperwork makes it through, there’s a chance it will be rejected. I’ve seen this happen more than once. Regardless of the reason for a rejection, a rejected form usually can’t be revised, which means you’ll need to start over with a new form rather than correcting the old one. This is another reason why it’s so important to keep copies and follow your paperwork throughout this process; the sooner you know you need to resubmit, the sooner you’ll be able to make corrections and keep things moving forward.

Step 4: Keep an eye on your 401(k) rollover money.

Once your paperwork is approved, make sure that your money successfully makes it into your new account. If your situation is an indirect rollover (which I mentioned previously), you’ll need to make sure the money makes it into your new account within 60 days so you aren’t penalized or taxed. This can be as easy as mailing a check to your new service provider (though sometimes it means cashing the check and then writing your own check), or initiating an electronic transfer to the new account. It’s important to check with your provider to make sure you’re correctly following the process to avoid those unnecessary taxes and penalties.

Even if your process is a direct rollover, you still will want to watch closely and make sure that the transfer of funds was initiated within that 60-day period following approval, and that all of the funds made it.

Finally, I’d add that you don’t have to do this alone. The process can be daunting, but as we’ve done countless times for our clients’ participants, your new service provider may be able to help you navigate this complicated process and avoid losing valuable savings while you change jobs and retire. Reach out to your provider and see if they can help or, if you’re in a position to influence your company’s retirement benefits, make sure you work with a provider that can support employees with rollovers and other complicated 401(k) activities.

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