Leaving a job also means exiting the 401(k) plan attached to that employer — but that doesn’t mean that you should walk away and forget about these funds. You can roll over your 401(k) into a plan offered by your new employer, or you can convert it into an individual retirement account. But it seems that many people don’t take the steps necessary to do this.
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A recent study conducted by Capitalize found that as of May 2021, there were 24.3 million “forgotten” 401(k) plans holding approximately $1.35 trillion in assets, with another 2.8 million left behind every year. And walking away from these plans can be incredibly costly to these individuals — leaving behind a 401(k) account has the potential to cost an individual almost $700,000 in foregone retirement savings over a lifetime, the study found.
So if you are currently transitioning out of a job, make sure you are not one of those people who leaves their 401(k) plan behind. Here’s what you need to know about rolling over your 401(k).
How To Roll Over a 401(k) to an IRA
You can roll your traditional 401(k) into a Roth IRA or a traditional IRA. Rolling it into a Roth IRA means you’ll have to pay taxes on the money you contribute, but you’ll withdraw the money tax-free in retirement.
Here’s how to roll over a 401(k) into an IRA:
1. Open an IRA Account
You can do this at an investment brokerage like Fidelity or Vanguard, or you can go to an investment advisor. Be aware of two things when you open the account: minimums and fees. Unless you have a lot of money in your 401(k) plan, you might have to shop for an account with a low minimum. And watch out for account fees and transaction fees.
2. Request the Rollover From Your Company
Fill out a form for your company to roll the money over into your new IRA account. Have the new account number on hand and follow the instructions on the form exactly or your rollover could be delayed. Ideally, you want your company to send the money directly to your new IRA account. This is called a direct rollover because the money goes directly from your 401(k) to your new IRA. Your employer should not withhold any taxes.
3. Meet the Deadline
Follow up to make sure the administrator processes your request in a timely manner, and then contact the investment company or broker where you opened your IRA to make sure the money arrives there in time. The money must be deposited into your IRA within 60 days of its distribution from your 401(k), which shouldn’t be a problem if you have it sent directly to your IRA.
4. Choose Your Investments
You’ll likely have more investment choices with an IRA than you had with your 401(k), so you might want to get some help with this. Expert advice should be available online or by phone if you opened your IRA at an investment brokerage. Otherwise, sit down with your financial advisor to go over your options. Your choices will depend on how close you are to retirement and how much risk you feel comfortable taking.
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How To Roll Over an Old 401(k) to a New 401(k)
If you’ve started a new job with an employer that also offers a 401(k), you have a couple of options. You can leave your 401(k) at your old company or you can take your 401(k) with you to your new job.
Here’s how to roll over your old 401(k) to your 401(k) with your new employer:
1. Open a New 401(k) Account
Contact the plan administrator at your new job to open a 401(k) account.
2. Complete and Submit the Paperwork
If necessary, get assistance with the paperwork to move your money into your new 401(k). Submit the completed forms and any required information to set up your new retirement account.
3. Choose Your Investment
Once the money is added to your new 401(k), choose from the investments your new plan offers.
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Important 401(k) Rollover Rules
Before you start the process to rollover your retirement savings, you should be aware of the following 401(k) rules:
- If you don’t put the money into another qualified account — like an IRA or another 401(k) — within 60 days, you’ll have to pay taxes on all the money you took out of your 401(k). You’ll also pay a 10% penalty if you’re under age 59 1/2.
- Some plans don’t allow you to roll over your 401(k) money if you are still employed at the company — you must leave for another job or retire to be eligible to roll over the funds.
You can add to your IRA once you’ve rolled over your 401(k), and your contributions are deductible if you roll over into a traditional IRA. Or you can contribute to the 401(k) plan at your new employer. Either way, continuing to set aside money to fund a comfortable retirement is a smart move.
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Gabrielle Olya contributed to the reporting for this article.
Last updated: July 27, 2021