How to Rollover a Retirement Plan Account

How to Rollover a Retirement Plan Account

July 20, 2023

We have covered employer sponsored retirement plans, such as 401(k)s, many times on this blog. There is a good reason for this as we receive quite a few questions about these types of plans. Many people have access to these plans but most don’t know very much about them. Specifically, we are often asked what the options are for a 401k account for someone who no longer works for the employer who sponsored the plan? We have answered this question in a prior blog post.  When it comes to 401k rollovers, we are bound by strict regulatory requirements to simply provide education but not to recommend rollovers. That said, please be sure to read the prior blog post to understand the pros and cons of all four options before making a decision.  This week’s post will explain what the rollover process typically looks like if you do decide to perform one.


Determine Necessary Account Types

                When preparing to rollover an old 401(k) account, a good first step is to determine which accounts you will need in order to avoid being hit with taxes and/or additional penalties. In the past, nearly all 401(k) contributions were made on a pre-tax basis including employer matches and profit-sharing contributions. This made the whole process relatively simple as the entire account could be rolled into an Individual Retirement Account (IRA). However, the option for employees to make Roth contributions inside their 401(k) has become increasingly popular thus making rollovers a bit more complicated.

                One of the key tenets of retirement accounts is that pre-tax and after-tax (Roth) dollars cannot mix. Up until very recently, while employees could direct their contributions to a Roth account, employers could not. Thus, many employees have 401(k) balances that are split between pre-tax and after-tax dollars. In order to rollover the entire account, an individual in this situation would need to have both a Rollover IRA (pre-tax) and a Roth IRA (after-tax) to roll the funds into. Recent legislation has made it possible for employer contributions to be made on a Roth basis as well which should clean up this issue in the future.


Contacting the Investment Company

                The next step in the rollover process should likely be considered the most frustrating. As far as we have come as an industry, many financial firms have a long way to go in this area. That said, in order to get your rollover started you will need to reach out to the investment company that manages the 401(k). I would love to tell you that all employer retirement plans work exactly the same way and that rollovers can be initiated easily on the investment company’s website. However, that would be a falsehood and I am duty bound to give you the cold, hard truth. Unfortunately, while some investment companies will allow you to start your rollover online (if you can remember your login) many require a phone call and perhaps even a paper form. When you reach out to start your rollover make sure that you have the following information available:


  • Your social security number
  • The account number for the account that your are rolling your money to
  • The mailing address of the financial firm that will be managing your new account

That last bullet point will be particularly important for the next and final step in the process.


Mailing the Check

                As I mentioned before, the financial industry tends to be a bit behind on the times. In order to rollover your account, the investment company which manages your account will need to send a physical check to your new retirement account. This is why it is important to have the mailing address for your new account! Some of our clients will also have their checks sent directly to our office where we are able to deposited them into their accounts remotely. Once deposited into your new account, your financial advisor should be able to assist you with investing the proceeds from your rollover. It should be noted that you can also have the check sent to your home address however, this is considered an “indirect” rollover and can only be done once in a 12-month period. Indirect rollovers require that the proceeds be reinvested within 60 days in order to avoid paying taxes and possible penalties on the withdrawal.


Why Rollover at all?

                If that sounds like a lot of hoops to jump through you are not alone! Many people either forget about their old 401(k)s or choose to leave them in the plan due to the work it takes to roll them over. This may be a perfectly fine option as the fees are often lower inside of a larger 401(k) than they would be inside of an IRA. So why do some people still choose to rollover their accounts? For some people the choice is merely a practical one. They simply want to have all of their investments in one place as opposed to scattered amongst several investment companies.

Other’s desire to have more control over their account and the greater number of investment options that an IRA often provides. When you invest inside of a 401(k) your investment options are limited to those included in the plan. When opening an IRA, either on your own or with an advisor, typically more options are available to you. In addition, many of the smaller 401(k) companies are consolidating and getting bought out by bigger players in the market. This can make it difficult for you to keep track of where your account is and how to access it. Rolling over your account puts the control back in your hands. Albeit, that control usually comes at a cost so it is important to evaluate your options, preferably with your financial advisor.


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This blog was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.