- If you have a phone and about 40 minutes, here’s the easiest way to move the assets to a new 401(k) or an IRA.
- It’s always best to be direct. The money goes right from the previous account to the new account.
- All you have to do is sit on the phone while the new provider walks you through the steps.
Few people work for just one employer over their lifetime, so knowing what to do with your old 401(k) plan when you switch jobs is an important skill.
You can do several things. First, you can leave the money where it is. There's nothing wrong with keeping money parked in your old 401(k), if your former employer allows it and the costs are low, but you won't be able to contribute to the account.
You can also roll the funds over to another retirement account, either your own individual retirement account or to another 401(k) plan, if you have one with your new employer.
While it's fine to leave your 401(k) untouched, Scott Hanson, a certified financial planner and senior partner at Hanson McClain Advisors, recommends rollovers.
"People suddenly find themselves with four different 401(k) plans," he said. If your address changes, it's up to the employer to keep up with you, but there's no gain in running the risk of losing track of your accounts, which may not stay invested the way you'd like.
Don't have the check sent to you. "It makes no sense to do that and there is no benefit," Hanson said. "In fact, it complicates matters."
First, you'll have yet one more item on your to-do list: making sure you mail the check within the 60 days to a new account, otherwise the government treats it as a taxable distribution. Second, if you don't request the funds precisely as needed, you'll come up short for the amount you want to roll over because of the mandatory withholding.
"Sometimes people don't read the forms, or they don't trust financial institutions," Hanson said.
Mistrust and mistakes aside, the problem here is that you'll automatically have 20 percent withheld for federal income taxes.
Let's say you have $100,000 in your 401(k) and you'd like to move it to a new employer's plan. You'll have 60 days to roll the money over, if it's disbursed to you as a check. "But the check is for $80,000," Hanson said. "So you have to come up with another $20,000 from somewhere."
Another common mistake is withdrawing the money instead of keeping it in retirement savings.
The rationalization is that it's no big deal, Hanson says. "Why don't I just take that money out and buy some new furniture?"
But it is a big deal. "One, if it's distributed in your working years, it's like a bonus, and it's taxed as if you made an extra $25,000," Hanson said, or whatever the amount you have in the 401(k).
You will pay early withdrawal penalties, as well, if you are younger than 59½, and there is also the opportunity cost when you give up the compounding and income you'd earn if the money stayed in an account. "I view retirement dollars as sacred dollars to take care of your old age," Hanson said.
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Start the process by telling both providers you want to do a trustee-to-trustee transfer. "It's not as painful as calling the phone company or the cable company," Hanson said.
You may have to spend some time on the phone while the provider walks you through the process. The transfer can be done electronically or via a check sent directly to the new 401(k) provider.
The check might be sent to you but won't be made out to you. "That is the key," Hanson said. "Find out from your new employer the name of the new provider. Then, you'll have to forward the check."
The easiest rollover of all happens when the same provider handles both plans and can do the transfer internally. Even between different companies, it's generally straightforward, and you get the benefit of keeping your retirement savings in a retirement account.