How to roll over your 401(k)

Retirement savings and investment plans are cornerstones of employer benefit packages, but everything changes when you leave that job. In all the activity and intensity of starting a new job, it’s easy to postpone the chore of moving your 401(k) account to your new employer.

But don’t postpone the shift for too long: The hassles of cleaning up a string of leftover plans from half-forgotten old jobs will only get worse the longer you delay. Tackle this essential bit of financial housekeeping for a swift and accurate 401(k) rollover of the money you earned for your future from a job that’s now in the past.

The basics of a 401(k) rollover

The essential process moves funds from one tax-advantaged retirement savings and investment account, a 401(k) in this case, to another. Because these accounts are designed to build retirement security, there are restrictions, fees and penalties for taking money out before you retire. (Even after you retire, there are rules about when, how and how much money you can withdraw.) It’s important to understand and follow these structured guidelines, because the fees and penalties for violating the rules of 401(k) management are strict and unforgiving.

How to roll over your 401(k)

An origin account and a destination account each need to exist before you can move your money from the current 401(k) where it resides to the new 401(k) or other formally designated retirement account, such as an individual retirement account (IRA).

Start by gathering the key information about your current plan. You can find this information in your employee handbook or its digital equivalent, such as a human resources app or dashboard that gives you access to the technical details of your retirement benefits.

It’s important to differentiate the employer’s human resources department from the 401(k) plan administrator. Often, employers outsource the management of the plans themselves to external firms that oversee the paperwork and investing. You will likely work with the plan administrator, not the human resources department, on the rollover.

Gather the documents that prove that you worked at the first employer and those that formally document your departure (such as a termination letter); your state-issued identification; and formal account coordinates for the destination account.

Usually, a plan administrator will provide a form for you to complete to document the specifics of the fund transfer.

If you empty the first 401(k) in the process of rolling the funds into the new one, you might have to complete paperwork that confirms that you are shutting down the account.

Finally, be prepared for a small processing fee. Know that it can take several days to a few weeks to complete a rollover and for the money to appear in the new account.

Benefits of a 401(k) rollover

“I’m a big fan of consolidation. It makes it easier to keep track of everything,” says Ashton Lawrence, senior wealth advisor with Mariner Wealth Advisors. “If you have multiple accounts out there it’s hard to be aware of them all.”

You might lose track of the contact and access information to administrators of 401(k) accounts from prior jobs, especially as administration shifts from one firm to another. Or the administrator might lose track of you as you move, potentially changing your name or phone number.

If you aren’t motivated to keep tidy 401(k) records for your own sake, have mercy on your heirs, says Lawrence. “If you have multiple 401(k)s and you pass away, your beneficiaries need to know, and you’ve created a lot of work for them,” he says.

The difference between direct and indirect 401(k) rollovers

The cleanest, safest way to transfer money from one 401(k) to another is directly, from account to account. That means you must coordinate the transfer between one plan administrator and another. Administrators are set up to send and accept rollovers, so they should provide standardized forms and confirmations that the funds have been sent and received.

It is possible to direct the funds to a holding account, usually at a bank, before sending it along to the next tax-advantaged retirement account. This two-step process is called an indirect rollover. But it is rife with potential for financial disaster, as it allows only 60 days, and not a minute more, to accomplish the shift of the funds to the receiving retirement account. If there’s a delay and the money lingers in limbo, protections from taxes vanish, because the funds are considered to be withdrawn prematurely from your retirement accounts. You will pay hefty penalties on top of income taxes.

401(k) rollover options

You can roll your 401(k) funds into another 401(k), into a traditional IRA or into a Roth IRA. A traditional IRA operates just like a 401(k), in that you do not pay income taxes on the money you put into it and instead pay income taxes on the money you take out (following IRS rules for withdrawals).

Roth IRAs are the opposite: You pay income taxes on the money you put into it and do not pay income taxes on the money you take out, and you have more latitude as to when and how you can withdraw money from a Roth IRA.

What happens after a 401(k) rollover?

After a 401(k) rollover is complete, the receiving account administrator sends you a confirmation that the funds have landed safely. Check that by logging in to the administrator’s dashboard or app for the account and verifying that the funds transfer is documented.

Early withdrawal penalties for 401(k) rollover

Rolling funds from one 401(k) to another is a commonplace and standard process that does not in and of itself invoke any taxes or early withdrawal penalties, as long as the money is transferred within 60 days.