3 Easy Steps to Move a 401(k) to a Rollover IRA

For most of us, money accumulated in 401(k) plans will form an important pillar of our retirement income, along with Social Security and money saved in taxable accounts. Thus, it's critical to take a strategic approach when deciding how to manage a prior 401(k) balance, ideally within three to six months of starting a new job. This would give you time to do some basic research about your options and/or consult with a financial professional, if desired.

For example, you'll want to look into available account options and the process of moving qualified retirement plan funds from your former employer to a new custodian. If you decide on a rollover IRA, the customer service teams at most rollover IRA service providers can answer basic questions about maintaining the tax benefits associated with qualified retirement plans during the rollover process. You may also want to consult with a tax advisor and your financial advisor about your own tax situation before moving money into a new employer's 401(k) plan or into a rollover IRA.

A direct rollover simply means that your former employer's 401(k) plan administrator will transfer the funds directly to your new rollover IRA service provider on your behalf. The benefits are twofold:

• Improved convenience—you don't need to make a deposit to your new account on your own.
• The full amount of your account balance will be transferred—no taxes are withheld during the account transfer because it's not a taxable distribution.

This is in contrast to an indirect rollover, where you manage the transfer yourself. If you choose this approach, you have 60 days from the date you receive your 401(k) distribution to deposit the full amount into an IRA to maintain its tax-deferred status. However, this approach generally is discouraged because your employer is required to withhold 20% for federal taxes, meaning you must use personal funds to bridge that gap or face immediate taxes and potential penalties on the shortfall.

Some plan administrators, especially if they partner with larger financial services organizations, may offer electronic funds transfer options for conducting your rollover request. Other plan administrators, including smaller or boutique organizations, may still need to mail a paper check to your new rollover IRA service provider. Both options are effective and will help you achieve your goal of streamlining accounts for easier account management. Use any available options from your prior plan administrator that you prefer.

As you streamline 401(k) accounts into a rollover IRA, take a moment to review your target allocations for stocks, bonds, and cash before making new investment choices. Your financial consultant, Certified Financial Planner® professional, or wealth advisor can help you create or update an asset allocation strategy based on your goals, risk tolerance, and time horizon. They can also help you identify new investments in your rollover IRA that match your asset allocation strategy.

Step 1: Open the rollover IRA with your preferred service provider.

Step 2: Fund your account.

• Complete any forms required by your former employer.
• Decide whether you want to perform a direct or indirect rollover. (A direct rollover generally is advised to avoid mandatory withholding taxes.)
• To request a direct rollover, provide your former employer with wire instructions from the custodian of your new rollover IRA account and/or a physical mailing address for your new rollover IRA provider.
• To prevent funds from being taxed, confirm the rollover IRA instructions details about how the wire transfer or check should be made payable. Typical language is "(New rollover IRA provider name) FBO (Your Name)."
• Give your former employer your rollover IRA account number and ask them to include it on the wire transfer or check, to avoid potential delays in the transfer process.

Step 3: Make investment selections for your retirement funds now held in your rollover IRA.

After you've opened your rollover IRA, check in with your retirement progress annually. And be sure to keep up with your retirement savings at your new employer by enrolling in a 401(k), if offered, and contributing at least enough to get the full company match—but ideally even more to help ensure you're on track for your future income needs.

Finally, create a personalized plan for retirement if you haven't already done so. There are plenty of free online tools to help you get started, and a financial professional can answer any questions you have, as well as create a plan that's tailored to your unique needs.