How to Rollover a Retirement Account

When you leave your job or maybe you’re preparing for retirement, one decision you will be faced with is what to do with your old 401(k) plan?

If you already have an established Traditional IRA account, you may want to consolidate your retirement accounts down to just one account to simplify life.

There’s a right way to do a rollover and a wrong way. There’s also an easy way and the hard way.

Here are the steps to properly rollover your 401(k) plan into a Traditional IRA and make it simple at the same time (along with some pointers).

Step 1: Locate the Statements on the Accounts

You will want the statements for the 401(k) plan you want to rollover and the statement from the IRA you are looking to move the money into. If you don’t have an IRA in place, you will want to set one up first.

The information you want from both accounts are the customer service numbers. To make life easy and keep anything from holding up the process I recommend contact both custodians (the 401(k) and the IRA) to see what they require to release and accept the funds.

Step 2: Finding Out What Each Company Requires

First you will want to contact your IRA custodian and let them know you want to do an inbound rollover. Simply ask them what they require to accept the money. In most cases, they will provide you a form to complete. The form will ask about the money that is being moved over (name of company, account type, etc.). This is also a good time to ask how the check should be made payable and the correct mailing address. Last thing you want is the check made out incorrectly or mailed to the wrong address. If you are working with an advisor, ask them about commissions or fees you would run into for rolling the money over to them. If they say none, call bullshit and start looking for another advisor.

Second, contact the 401(k) custodian. Let them know you are looking to do a direct rollover to your IRA (A direct rollover means the check will be made payable to XYZ Company FBO You). Ask them what do they require to release the funds. They will say one of 2 things: the transaction can be processed over the phone (why I recommend calling the IRA custodian first, to get the payment and mailing instructions) or they will mail you forms to complete. Now is also a good time to ask about any processing fees you may incur, or if you are unfortunate to have a less reputable company holding your assets, type of surrender charges or back end loads you would incur. Best to know up front. If there are surrender charges, ask when those go away.

Step 3: Complete Any Required Forms

Complete any paperwork that is required and mail the forms back to the respective companies. From here, it’s just the wait time for processing. If your 401(k) account requires forms to be completed, I recommend following up with them after a week to make sure they have everything they require. Not doing the follow up, can lead to delays in processing the rollover. You want your funds moved as quickly as possible, since the money will be temporarily out of the markets.

Step 4: The Check is Mailed

Once paperwork is complete, the rollover check will be mailed to either yourself or the receiving IRA. If you receive the check, don’t worry. Just make sure the check is payable to the IRA for your benefit. You may wish to make a copy of the check and throw it in your tax file to serve as a reminder come tax time (more on that in a bit). No need to endorse the check, since it is payable to the IRA custodian…simply forward the check to the IRA.

If the check was mailed directly to the IRA, congrats, it’s done.

Step 5: Tax Forms

While doing a direct rollover is not a taxable event, it is a reportable event. Meaning, the 401(k) will send you a 1099-R tax form, reporting the rollover event to the IRS. Look on Box 7, you want to see code G (direct rollover). If another letter or number shows, call the 401(k) and have them correct the 1099-R. These 1099-R forms go out by late January and you should receive it around mid February.

The last tax form you receive is called the 5498. You will receive this from the IRA in May (following the year of the rollover). This confirms the money received in the IRA for the rollover.

The above 5 steps are also applicable in the case you are doing a transfer of a Traditional IRA to another Traditional IRA, or a Roth IRA to another Roth IRA. I always like contacting both institutions, to prevent any delays.

Some Pointers on Doing a Rollover:

Make sure you do the rollover as a direct rollover (the steps described above). There is also something called an indirect rollover. Avoid this at all cost. With an indirect rollover, the check is actually payable to you and you will see 20% in federal taxes withheld (some states require withholding as well). You have 60 days to get the FULL amount back into an IRA (and you have to make up for the tax withholding) in order for the distribution to not be taxable. Let’s say you did an indirect rollover of $500K. 20% federal withholding means $100,000 is taken off the top for taxes. In order for the full $500K to not be taxable, you have to write a check for $500K to the IRA and get the money to them within 60 days. Writing a check for only $400,000, means the $100K in taxes taken out counts as income for you. The other problem with an indirect rollover, you have to report it a little differently on the 1040. But also, the IRS is cracking down on this. Typically 2 years after the transaction has occurred, you might receive a letter from the IRS saying you owe taxes on the full distribution. This is where keeping records is keep. You should have a confirmation letter from the IRA about the indirect rollover, but also keeping a copy of the check you wrote becomes important. You have to prove you did in fact move the money into an IRA.

Another tip. Check to see if you have any Roth Elective Deferrals in your 401(k) prior to doing the rollover. If you do, those funds need to be moved over to a Roth IRA, so make sure you have a Roth IRA in place first.

If you hop around jobs a lot, it’s a good idea to rollover your 401(k) balance into an IRA. Having multiple small 401(k) plans scattered around can be hard to track. Also, worst case scenario, the employer changes 401(k) vendors and you’ve moved and never updated your address, this can make it hard for you to locate the money.

Using the above steps can help you from getting stuck on your rollover…