Starting a new job is an exciting prospect – both for your career and your retirement plan. And taking your 401(k) with you means transferring the funds to a new account, such as another 401(k) or an IRA. However, penalties loom for transfers that take longer than 60 days. The timing of a 401(k) rollover depends on what you’re rolling over your 401(k) to and who you use. Here’s how it works and what you need to know.
A financial advisor can help you create a financial plan for your retirement goals and needs.
What Is a 401(k) Rollover?
A 401(k) rollover is a process that allows you to move funds from one 401(k) retirement savings plan to another without triggering taxes or penalties. The most common scenario motivating this change is when you switch jobs or retire. The rollover lets you transfer the money accumulated in your employer-sponsored retirement plan to an IRA or another qualified retirement plan, including 401(k)s and 403(b)s.
You can choose between a direct and indirect rollover when conducting this change. With a direct rollover, your old plan administrator directly transfers the funds from the old 401(k) to your new retirement account without passing through your hands. This method helps you avoid taxes and penalties but requires you to follow up with your plan administrators to ensure the rollover is successful.
On the other hand, an indirect rollover means you receive the funds. Then, you have 60 days to deposit them into the new account to avoid taxes and penalties. However, if you fail to complete the transfer within the specified timeframe, you may be subject to taxes and penalties.
If you choose the indirect rollover option, it’s optimal to follow the 60-day rule. Otherwise, the distribution may be subject to income taxes and, if you are under 59½ years old, an additional 10% early withdrawal penalty.
How a 401(k) Rollover Works
The rollover process may vary slightly depending on the policies of your current and new retirement plan providers. It’s crucial to communicate with both plan administrators and, if necessary, seek advice from a financial advisor or tax professional to ensure a smooth and tax-efficient rollover. That being said, here’s a detailed breakdown of the steps that rolling over a 401(k) usually entails:
Choose Your New Account Type
Determine where you want to roll over your 401(k) funds. Options include a traditional IRA, a Roth IRA, or another employer-sponsored retirement plan if your new employer allows it. Consider factors such as investment options, fees and whether you prefer a traditional pre-tax or Roth after-tax account. Remember, rolling over a traditional 401(k) to a Roth 401(k) incurs income taxes the year you conduct the transfer.
Set Up Your Designated Account
Open the new retirement account that will receive the rollover funds. This could be with a financial institution like a bank, brokerage firm, or a specific retirement plan provider. In addition, it might involve working at your new employer for a specified period before qualifying for and opening a new 401(k). Provide the necessary information to establish the account, including your personal details and the account type.
Review Your New Plan’s Rollover Process
Contact the administrator of your new retirement account and inquire about their specific rollover process. They will provide you with information on the required forms and procedures. Obtain any necessary forms and disclosures related to the rollover and communicate all the information with your old plan provider to ensure they complete their end of the transaction correctly.
Initiate Rollover
Contact the administrator of your old 401(k) plan by reaching out to the HR department of your current or former employer. They might direct you to speak with the third-party plan administrator to start the rollover. You can request the necessary paperwork to initiate the rollover and communicate how your new plan wants the funds, such as with a check. In addition, it’s essential to clarify if the new plan administrator prefers a direct or indirect rollover.
Deposit Your Distribution Within 60 Days
If you choose an indirect rollover, ensure you receive the distribution check promptly. Deposit the distribution into your new retirement account within 60 days to avoid potential taxes and penalties associated with early withdrawals. If using a direct rollover, confirm with the new plan that the funds have been received and properly credited to your account.
How Long Does a 401(k) Rollover Take?
The timeline for a 401(k) rollover can vary based on several factors, including the type of transfer and the efficiency of the involved financial institutions. Remember, the IRS’s 60-day rule states that if you choose an indirect rollover, you have 60 days to deposit the funds into a new retirement account to avoid taxes and penalties. Here’s a breakdown of the timeframes associated with different types of transfers:
- Direct rollover: With a direct rollover, your plan administrator moves the funds directly from one retirement account to another. This method is one of the quickest ways to complete the transfer. It’s usually done within a few weeks, but it can vary depending on the plan administrators’ efficiency.
- Trustee-to-trustee transfer: A trustee-to-trustee transfer involves moving funds from your old 401(k) to your new IRA. Similar to a direct rollover, this transfer method is generally efficient because the administrators handle the transfer, but it can take a few weeks.
- Indirect rollover: If you choose to receive a distribution check (indirect rollover), the 60-day clock starts ticking from the day you receive the check. The initial distribution from the old account can take some time, and the speed of the deposit into the new account depends on how quickly you act. It’s crucial to deposit the funds into the new account within the 60-day window to avoid taxes and penalties.
Bottom Line
A 401(k) rollover is a strategic financial move that allows you to transfer funds from one retirement savings plan to another. This process usually takes a few weeks but can vary based on how fast your plan administrators conduct the transaction. On the other hand, if you receive a check because of an indirect rollover, you have 60 days to complete it. As a result, it’s crucial to send the funds to your new plan administrator quickly and communicate frequently with all involved parties to avoid penalties.
Tips for 401(k) Rollovers
- Whether you get an IRA or need advice on which retirement investment makes the most sense, a financial advisor can help you create a plan to reach your goals. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- At age 59 1/2, you can roll over your 401(k) whenever you want. Here’s how to know the best time to roll over.
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