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What Is a Rollover?
First, some terminology. A 401(k) plan is a type of retirement savings and investing account that provides for preferential tax treatment of your money. Investments inside of a 401k plan grow tax-deferred which means that you do not have to pay taxes on things like dividends, interest, and capital gains each year. This is an enormous advantage to saving for retirement on your own in a regular savings or brokerage account. Accounts without these tax advantages are referred to as non-qualified accounts. Essentially, such accounts are not qualified to receive special tax treatment.
In order to get the great tax benefits provided by a 401(k) plan or other qualified retirement plan such as an IRA, or 403(b) plan, you must comply with certain rules and regulations laid out by the IRS. One of the best-known rules is that you are not allowed to withdraw money from your 401k until after you turn 59 ½ years old. If you do, you will be forced to pay a 10% tax penalty.
Since 401k plans are employer sponsored plans, any 401(k) account you have will be attached to an employer in some way. When you stop working for that employer, you can just leave the account where it is. It is still your money.
But, that plan is still attached to your old employer. That means that if you need to do something with your 401k you might end up calling the HR department at your old company and there might not be anyone left there that even remembers you. Basically, leaving an old 401(k) plan with your employer is a recipe for neglect and hassles.
However, you can’t just withdraw the money from your 401(k) plan or you will get hit with the resulting taxes and penalties. In order to get that money out of your old 401(k) plan and into something better for you, you will have to do a specialized transfer of funds.
You cannot do a tax-qualified rollover on your own. You have to do it through the company where you are transferring your money. The company that holds your retirement account is known as the custodian.
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Steps To Rollover 401k Plans
The key step in doing a 401(k) rollover is making sure that the money never gets into your hands. Once a single dollar ends up in your bank account, you have a problem.
To keep the money out of your hands, you initiate a rollover or trustee-to-trustee transfer of your 401(k) funds via the custodian of the new account. Typically, the custodian is a brokerage firm, though it can be a bank, or other financial institution. (Note that rolling a 401(k) into another 401(k) plan is a different process.)
The first step to rolling over your 401k is to open a new retirement account that will house the money that transfers from your 401(k). This account will also need to be a qualified retirement account, normally, a traditional IRA. It cannot be a Roth IRA.
Next, you will need to fill out paperwork from the new custodian to initiate the transfer or you will have to call the 401k plan administrator depending upon how your plan was setup.
If you can use the paperwork route, do that. It will help avoid any mistakes. Your broker or investment advisor can help you complete the form.
If you have to make a phone call, ask for a financial professional from your new custodian to make the call with you as a conference call. This way, you can verify that you are saying the right things.
After the transfer has been started, the funds will either be transferred directly to your new financial institution, or you will be sent a check made out to your new account. The check is not made out to you even if you see your name on it, so do not sign the check. Instead, deliver it to the financial institution without altering it or writing on it in any way. They will deposit it in your account for you.
That’s all it takes.