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July 1, 2023

How to roll over your 401(k) in 5 easy steps

If you’re leaving your job for a new employer, it’s important to address whether or not to roll over your 401(k). The wrong decision could end up costing you.

Rolling over a 401(k) with a high expense ratio into a fee-free individual retirement account (IRA) could save you a substantial amount of money. According to the Department of Labor, a 1 percent increase in fees could reduce your retirement account balance by 28 percent.

This choice isn’t the perfect one for everyone. But if it is the right fit for you, how do you get the money from your 401(k) to an IRA? It’s called a 401(k) rollover and requires the following steps.

How to roll over your 401(k)

Follow these five steps to get started on your 401(k) rollover:

  • Decide where you want the money to go.
  • Decide what kind of account you want.
  • Contact the right institution to open your account.
  • See what the procedure is to begin the rollover process.
  • Remember the 60-day rule.

What is a 401(k) rollover?

A 401(k) rollover is when you direct the transfer of the money in your retirement account to a new plan or IRA. The IRS gives you 60 days from the date you receive an IRA or retirement plan distribution to roll it over to another plan or IRA. You’re allowed only one rollover per 12-month period from the same IRA.  This one-rollover-per-IRA limit doesn’t apply to plan-to-plan rollovers and some other types of rollovers.

Overview: How to start your 401(k) rollover

  1. Decide where you want the money to go

Choose a brokerage or bank that you want to roll over your money to.

Bankrate has done the homework for you with its Brokerage Reviews. These reviews will help you compare key areas that should factor into your decision. You’ll find information on minimum balance requirements, investment offerings, customer service options and ratings in multiple categories.

Takeaway: If you already have an IRA, you may be able to consolidate this money.

Decide what kind of account you want

Start by deciding whether you’re going to be a self-directed investor – making your own investment choices – or whether you’ll have an adviser making the choices for you.

You’ll also decide whether you want the money to be rolled into an IRA and whether you want the money invested in stocks, mutual funds, exchange-traded funds (ETFs) or other investment options.

If the funds are going to be deposited in an IRA bank account, you’ll want to compare IRA savings accounts and IRA CDs to find the best fit for you. If you’re under 59 1/2 years old, traditional IRAs are meant for withdrawing money after you reach this age. Generally, you’ll incur a 10 percent penalty when making an early withdrawal.

An IRA CD may be a good option for money that needs to be saved at a fixed rate, and can’t be exposed to the volatility of investments, such as stocks or exchange-traded funds (ETFs). It also may be a good place for money that you want to be protected by either the Federal Deposit Insurance Corp. (FDIC) or at a National Credit Union Administration (NCUA) credit union. Always make sure that your IRA savings accounts or CDs are backed by the FDIC and deposits are within the insurance limits.

Takeaway: Your age – how far you are from retirement – and risk tolerance are going to factor in your decision as well.

  1. Contact the right institution to open your account

If the 401(k) company is sending a check, your IRA institution may request that the check be written in a certain way and they might require that the check contains your IRA account number on it.

Takeaway: Follow your IRA institution’s instructions carefully to avoid complications. Your 401(k) institution may be able to wire the funds to the IRA institution. So check there to see what your options are for rolling your 401(k) into an IRA. And whether there are any fees for using this option.

  1. See what the procedure is to begin the rollover process

After setting up the IRA, you are probably going to be asked to contact your 401(k) administrator.

You will want to select a direct rollover.

Takeaway: In a direct IRA rollover, the funds are sent straight from your 401(k) into an IRA without you touching the funds. It is important that you specify a direct rollover so that you don’t have the check made payable to you — triggering a mandatory 20 percent withholding for taxes.

  1. Remember the 60-day rule

You have 60 days from the date you receive your retirement plan distribution to get it deposited into a qualified account; otherwise, it will be a taxable event.

Your 401(k) institution may send a paper check to you, to the institution where you are opening your IRA, or the money may be rolled over digitally via wire transfer.

Takeaway: If taxes are withheld from the distribution, you’ll need to use other funds in order to roll over the full amount.

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