How to rollover your 401(k) plan smoothly while switching jobs

When leaving a job, you have the option to either keep the plan as is, cash out the 401(k), roll it over to an IRA, or consolidate the old 401(k) with a 401(k) at the new employer.

When leaving an employer for reasons other than retirement, it is important to ensure that you make informed decisions regarding your 401(k) plan.

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Maybe you’ve found a new job or you want to open your own business, but you’re leaving your old job. Before you go, make sure that you take care of the 401 (k) plan that you have with your employer. 

If you don’t need to cash out your 401(k) immediately, a smart move is to roll your plan over into an IRA. IRA accounts offer a wider choice of investment options when compared to most 401(k) plans. Choosing between a Roth IRA and a traditional IRA is a matter of either getting taxed on contributions now or later.

What rolling over your 401(k) involves

Follow these simple steps to rollover your 401(k) into an IRA 

  1. Select the type of IRA account you want to open
  2. Open a new IRA account
  3. Ask for a direct rollover within 60 days
  4. Select your investments

Select the type of IRA account you want to open

Doing a 401(k) rollover to an IRA will give you more options for investment and may even have lower fees than your old 401(k) plan.

  • A rollover to a Roth IRA means that you’ll owe taxes on the amount rolled.
  • A rollover to a traditional IRA means that the taxes are deferred.

Open a new IRA account 

There are two options for opening an IRA: through an online broker or using a robo-advisor.

  • If you don’t have the time to be actively involved or if you don’t want to pick individual investments, a robo-advisor can be a great option. Robo-advisors are automated services that build personalized portfolios for you using low-cost funds based on your investment preferences. Over time, robo-advisors rebalance those funds to help you stay on track to reach your investment goals. Being automated means that they charge a considerably lower fee than conventional investment managers.
  • If you want to play a more active part in your investment decisions and build and manage your investment portfolio yourself, going through an online broker is the right choice. Pick an online broker that charges little to no account fees, has a wide array of low-cost investment options and is well-reputed for customer service. 

Ask for a direct rollover within 60 days

Asking for a direct rollover will ensure that your 401(k) plan check is directly deposited to your new IRA account and not to you personally.

Here’s what you need to do: 

  1. Get in touch with your former employer’s plan manager. Fill out a few forms, and ask them to write a check or wire the account balance to your new IRA.

2. Your new account provider will give you instructions on how the transfer should be executed. Also, get what information you’ll need to include and where the money should be sent.

If you want to do an indirect 401(k) rollover instead, you’ll have to withdraw the money and send it to your IRA provider yourself. This may result in tax complexities, which is why doing a direct rollover is recommended.

Once your 401 (k) account balance is disbursed directly to you, you only have 60 days to get it deposited into a qualified account. If you fail to do so, the amount becomes taxable. 

Doing an indirect rollover gives the plan administrator the power to withhold up to 20% of your check to pay taxes on the distribution.

If you want to get that money back, you will have to deposit the complete 401(k) plan balance into your IRA, including the amount withheld for taxes, within 60 days of receiving the funds.

Select your investments

Once your 401(k) plan balance is deposited in your new IRA account, you can start picking your investments. 

  • While investing money, people often go for low-cost index mutual funds or ETFs. As an enthusiastic and novice investor, you might be attracted to individual stocks and bonds. While it is something that you can do, keep in mind that this approach is best suited for professional and experienced investors.
  • If you are new to this, it will be easier to achieve diversification and get better long-term returns by picking mutual funds or exchange-traded funds (ETFs).
  • Many 401(k) plans distribute investments into target-date funds. These target-date funds buy shares of other mutual funds intending to move investments automatically over time till the target date is reached.
  • If you’ve chosen the robo-advisor route, that service provider’s algorithms will automatically select investments for you based on your preferences.

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This page is purely informational. Line does not provide financial, legal or accounting advice. This article has been prepared for informational purposes only. It is not intended to provide financial, legal or accounting advice and should not be relied on for the same. Please consult your own financial, legal and accounting advisors before engaging in any transactions.

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