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How to Rollover Your Old 401(k) Plan

Do you have an orphan 401(k) account sitting out there from a job you left years ago? If so, you should consider rolling that money over to your own IRA. But the process can be confusing and the paperwork intimidating. So here's a quick guide on the basics of a 401(k) rollover.

Why Do It. There are two good reasons to rollover your 401(k) money.

  1. First, if you roll it over to an IRA, you'll likely have far more investment options than you have in your 401(k). Most 401(k) plans have a limited number of investments, and often the investments aren't that competitive. If you open an IRA at a brokerage firm, you can basically choose from the whole universe of investment options, from individual stocks and bonds to low cost index funds.
  2. Second, you'll likely lower the investment costs on your portfolio. 401(k) plans are frequently loaded with fees, particularly if you're with a smaller employer. The fees are high because of the regulatory costs of ERISA (which is the federal law that governs retirement plans) and because lots of different people are getting paid from your portfolio. In a typical 401(k), you could have fees from the mutual fund companies, the 401(k) provider, a broker, and an administrator. If you move to an IRA, you get out from underneath ERISA and you get rid of a lot of those providers who are extracting fees from your retirement plan.
Taxes. In general, you can rollover your 401(k) money to an IRA without incurring any taxes. This is called a direct rollover and is the most common type of rollover. In some special cases, such as if you have employer stock in your 401(k), or non-deductible contributions, you'll need to dig into the tax details because there are some additional planning opportunities available. But most 401(k) rollovers are very straightforward. As always, you should check with your tax advisor to ensure you're making the correct tax elections for your specific circumstances.

Paperwork. To get the process started, you'll need to request 401(k) distribution paperwork from your old employer. Each company has its own process for doing this, depending on who administers their 401(k) plan. The best thing to do is call your old employer and talk to someone in the HR department who handles the retirement plan. They can send along the paperwork. If they don't have an HR department, as many small companies don't, then talk to whoever handles payroll issues and they can point you in the right direction.

New IRA. If you don't already have an IRA, then you'll need to open up an IRA at a brokerage firm. This is easy to do. Just about every brokerage or financial firm can help you setup an IRA to accept a rollover from a 401(k) plan.

  • Moreover, they'll often help you complete the rollover paperwork from your old employer. They generally have the necessary experience to help you navigate the forms and make the proper elections to facilitate the rollover.
  • Sometimes you'll also be asked to provide a "letter of acceptance" from the new brokerage firm acknowledging that this is an IRA that can accept 401(k) rollovers. It's a bit of a pain, but the brokerage firm will know what needs to be done.
If you already have an IRA, then you can use that IRA to accept the rollover.

Return the Paperwork. Once you've opened your new IRA, filled out the rollover paperwork and gotten your "letter of acceptance" (if required), then you have to get the forms back to your old employer. Sometimes it has to go back to the HR department and sometimes it goes directly to the 401(k) provider. Your old employer can tell you where you need to send the form. Once the form is submitted, the 401(k) administrator sends out the check and then you deposit that check in your new IRA. That's it.

While it might seem like a lot of work to rollover your money, usually the process is relatively easy. You just have to make a few phone calls and fill out some account paperwork.

Bottom line. Better investment options and lower fees make 401(k) rollovers worth the effort.

Above material does not constitute tax or investment advice. Consult your individual tax or investment advisor prior to making any financial decisions.
Learn More: Want to learn about a simple way to manage your personal finances and prepare for retirement, investigate my new book Your Money Ratios: 8 Simple Tools For Financial Security, available in bookstores and at amazon.com The Wall Street Journal called the book "one of the best finance books to cross our desks this year." WSJ 12/19/09.

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