How to Rollover Your 401(k)

When leaving an employer, there are several options for the money you have invested in your company-sponsored 401K plan. Some companies allow terminated employees with a sufficient account balance to leave money in the plan; however, many require you to withdraw your money in the form of a forced distribution, or you can rollover the funds into a new 401K or an individual retirement account (IRA) account. To avoid penalties and potential tax implications, a 401K rollover is the best option for most participants. Plus, you will keep your money working for you.

Where to Move Your Money

The first step in the rollover process is to determine where you will move your money and to open a new account. You only have sixty days to roll over a 401K into another qualifying account. Sixty days may sound like a long time, but unless you already have a brokerage account and/or a relationship with a financial advisor, you’ll need to allow yourself sufficient time to find a firm you trust to manage your money, get your IRA account opened, and have the 401K funds transferred into your new account. The IRS penalizes 401K rollovers made outside of the sixty-day window.

Request the Rollover

The second step in the rollover process is contacting your former employer’s plan administrator to request a rollover. If you have online account access, you may be able to request the 401K rollover electronically. If you are rolling it into an IRA or a new employer’s 401K, direct rollovers are the best way to avoid tax complications. With a direct rollover, funds are sent directly to the new account provider. If you choose an indirect rollover, taxes will be withdrawn, and the remaining balance will be sent directly to you for deposit into the new account.

Allocate the Funds

The final step is to determine where you want your retirement investments directed. If you work with an investment professional, they will invest the funds in your IRA account based on the investment strategy and long-term planning needs discussed with your financial advisor. If you are taking the do-it-yourself method or are participating in a 401K plan with a new employer, you can select investments and funds based on your risk tolerance and those that have targeted-dates for when you plan to retire. Finally, be sure to select funds that are low cost so that you can put more of your money to work.

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