When changing jobs or retiring, one important decision you will face is whether to roll over your employer’s retirement plan (401k, 403b, pension, SIMPLE or SEP IRA, etc.) to an IRA. Before you leave your employer, there are a couple of things you need to be aware of. Below are some questions to ask, and the steps involved in transferring your savings. Note that these can apply to most employer retirement plans.
Some Questions to Ask First
Is there a loan against your 401(k)? Unpaid loan balances are due upon separation from your employer, or they may be considered a taxable distribution. This can be really ugly, so be sure to pay off any loans before you leave your job.
Are your 401(k) plan investments acceptable? This is often harder to judge by a cursory look, but the most important thing here is to understand the combined costs of the investments and your plan administrative fees, and whether these investments have provided reasonably good results.
Is asset protection (guarding your savings from lawsuits) a significant need? For most of us, this shouldn’t be a concern. However, the Federal law governing retirement plans provides very strong asset protection for assets held by Qualified Retirement Plans like 401k and pension plans, and does not include IRA based plans like SIMPLE or SEP IRAs. This is important if you work in a profession with high liability risk like physicians or attorneys. For the rest of us, the asset protection provided in a Rollover IRA may be sufficient, or it can be easily addressed with liability insurance.
Will your employer charge you extra to keep your funds in the 401(k)? They are legally allowed to do this, so find out how much it will cost you each year.
How to rollover your 401(k) to an IRA
1. Select where you want to open your IRA. Remember that an IRA is a type of account, not an investment. You can start one at any brokerage firm, bank, mutual fund company or other financial institution.
2. Complete the account application and open your Rollover IRA. It has to be a Rollover IRA if you want to preserve the option to put the funds back into another employer’s retirement plan in the future.
3. Contact your employer or 401(k) provider and ask for a distribution request form. Also ask what, if any, fees might be involved in liquidating your investments and transferring them to your IRA. Finally, you should ask if you need to sell any investments before your account can be transferred. This is rare, but it does happen.
4. Complete the distribution request form and send it to your employer. Be sure to elect a custodian-to-custodian transfer. Any funds sent directly to you will be considered a taxable distribution unless you deposit them into an IRA within 60 days. It will also generate a 1099R and be reported to the IRS, so if you are sent a check, remember how you handle it when you go to file your taxes next year. Remember also that if you are married, your spouse will need to sign this form before the transfer can be processed (often in front of a notary).
5. Follow up with your employer to ensure they’ve processed the distribution form. This can take some time. You can also periodically check your 401(k) account to verify that it’s been closed and transferred.
6. At the same time, you may want to check your new IRA to see that funds have arrived. Remember that there might be a delay of up to a few weeks between money leaving your 401(k) and arriving at your IRA.
7. Once your account is transferred, you can invest your new IRA according to your objectives. You may want to check back with your employer to verify that all of your 401(k) has transferred. Sometimes a late dividend or interest payment might be received and not transfer right away.
This column is prepared by Rick Brooks, CFA®, CFP®. Brooks is Director/Chief Investment Officer with Blankinship & Foster, LLC, a wealth advisory firm specializing in comprehensive financial planning and investment management. Brooks can be reached at (858) 755-5166, or by email at firstname.lastname@example.org. Brooks and his family live in Mission Hills.