By: A. Jason Whitby, CFP®, CFA, AIFA®, MBA

Are you unhappy with your 401(K)? If you are like most people, then you too are very dissatisfied with your 401(K)’s investment options and high fees. This is exactly why so many people decide to move their money from a 401(K) to an IRA rollover as soon as they leave their job. Some people even elect to rollover eligible 401(K) balances even while they are working. The rollover process has a wide range of costly landmines for the uninformed. The steps can be extremely simple or extremely complex depending on your plan. The tendency is for people to give up at the first road block. You have to remember that your existing 401(K) provider doesn’t really want you to move and they are incentivized to keep your account.

If you have already decided that you want to move your 401(K) plan, here are the two main options you have: 1) Call me or 2) Follow this four step process, make copies of everything, keep detailed records of dates and names and get comfortable because it can take a long time, mostly on hold.

Step 1: Gathering Information and Forms

Call your former employer’s HR department.

  • Find out if they require anything for a direct rollover. Ask who the plan administrator is. Ask who the 401 (K) custodian is. Sometimes the plan administrator is also the 401(K) custodian but not always.

Call your plan administrator.

  • Ask if you are eligible for a lump sum rollover. If you are no longer working for the sponsoring company you should be eligible.
  • If are still working for the sponsoring company or if you are not eligible for a lump sum rollover, find out if any money is eligible for a partial rollover or an in-service withdrawal. Some company retirement plans have an all or nothing rollover policy so you need to ask.
  • Find out how much of the eligible balance to rollover is pre-tax versus after-tax. If you have any after-tax money, you need to decide if you want that money to be sent directly to you in a separate check (over 59.5 years old) or if you want it to be rolled over to the IRA. If you roll it over, be sure to keep track of this amount since it is your cost basis which means you shouldn’t pay taxes on this money since you already did. You also might want to consider converting the after-tax portion to a ROTH IRA though that decision involves a much more in-depth decision process.

Call your plan custodian.

  • Be sure to ask if you have any balance in a ROTH 401(K) or if it is all in a Regular 401(K). If you do have any funds in a ROTH 401(K), you will want to do a direct rollover for that balance to a ROTH IRA.
  • Be sure to ask if there will be any fees incurred. Fees vary and may include transfer fees, closing fees, fund redemption fees. If there will be fees, ask if there is any balance you can rollover without incurring such fees. Depending on the type and extent of the fees, you might be able to get your new IRA rollover provider to cover the cost. If the fees are too high, you need to figure out what is causing the fees and if there is anything that can be done. For instance if there are short-term redemption fees on the funds, you need to stop contributing to these funds and wait until the redemption period expires.
  • You need to find out if there are any surrender penalties. If there are, ask if there is any balance you can rollover without incurring the penalty. Typically you will find this issue with 403(b) accounts that have selected the annuity option. For example, one specific annuity option for 403b plans requires about 10 years for the participant to completely rollover their balance without incurring the surrender penalties. So you might only be able to do a partial rollover today and have to wait for the remainder until the surrender penalties expire.
  • If you are still working and planning to do an in-service withdrawal, you need to ask if there will be restrictions for your participation moving forward. For example, some plans allow in-service withdrawals but will prohibit you from contributing to the plan for the next six months. If there are restrictions, you need to weigh the rollover benefit against the restrictions moving forward.
  • Next, let them know you want to do a DIRECT ROLLOVER (Trustee-to-Trustee). Ask them what the options are for implementing a direct rollover. Some will be able to do an electronic transfer while others will only be able to issue a check. It is always best to make it a DIRECT ROLLOVER which means the money is never titled in your name. The ideal option would be to transfer the funds directly to your new account electronically.
  • Ask if they require a Letter of Acceptance and ask if it needs to be notarized or certified.
  • Ask if they require notarized spousal consent.
  • Ask for the direct rollover forms and any paperwork to do a DIRECT ROLLOVER.

What if you have a 403(b), 401, 457, SEP-IRA, Keogh, Profit-Sharing, Simple-IRA?

These 4 steps will work for just about any qualified retirement plan.

What if you are under 59.5 years of age and planning to retire early?

The Rule-of-55 allows a worker who retires or leaves a job after the year in which he or she turns 55 to take non-penalized withdrawals from a 401(K). However, if the funds go into an IRA and are then withdrawn, prior to age 59 ½, a 10% penalty would apply. If you are planning an early retirement after age 55 but before age 59 1/2, and if your 401k plan allows it, funding your retirement needs from your 401k plan may make better sense.

What if you are still working?

Your plan might allow in-service withdrawals to an IRA Rollover while still employed. You have to call and ask them if they allow in-service withdrawals sometimes known as in-service rollovers, AGE-59.5 Rollovers or AGE-65 Rollovers. Remember to ask if the plan has any provisions or restrictions that would discourage such a rollover.

Okay, by now you should know what you have and what your options are. If you are doing this alone, you will need to decide between the options at hand.

Step 2: Contact your chosen IRA Rollover account custodian.

1. Ask them if they require anything to accept the direct rollover.

2. Open up your IRA Rollover account.

3. If your 401k provider only distributes by check, ask them how they would like the check to be made out for a DIRECT Rollover.

Now you should have your new account ready to receive your direct rollover.

Step 3: Execute the Transfer.

1. Submit the direct rollover forms and required documentation to the custodian or plan administrator, which ever applies to you.

2. Be sure to provide them with your new IRA Rollover account number. It should be on your check or part of the electronic transfer request.

3. It’s important to avoid any receipt of the funds that might trigger an unanticipated tax consequence. The DIRECT ROLLOVER (Trustee-to-Trustee) transfer minimizes the chance of a taxable event occurring during the transfer process.

4. The direct rollover typically takes two to six weeks though it can be even longer depending on the responsiveness of your 401(K) provider.

5. You should periodically contact the HR department, the custodian or the administrator to verify progression.

6. If you get a check in the mail, make sure the balance is what you had expected and make sure the check was made out correctly. Remember, the check should not name you directly but should name the new custodian for your benefit and include the new account number.

7. You will have 60 days, including weekend and holidays, from receipt to make the deposit into your new account. Remember to request that your new account number be included on the check or the electronic transfer.

Warning – If the rollover check is payable to you, the firm must withhold 20% of the distribution. As a result, you will get a check for only 80% of your 401(K) balance. This means you will need to come up with the remaining 20% from your own pocket to deposit into your IRA rollover. You will receive credit for the taxes that were withheld but not until you file the following year. This could leave you short on cash, out of the markets or providing a sizable interest-free loan to the government. To avoid this 20% headache, you need to complete a DIRECT ROLLOVER (Trustee-To-Trustee) which essentially means you never get the money in your name but rather FBO (For the Benefit Of), For Your Benefit.

Step 4. Once the money is in your new IRA Rollover:

1. You will likely have to transfer cash from your 401(K) so you should have an idea of what you are going to do with the money once it is deposited.

2. Contact your old 401(K) custodian and confirm that they show a zero balance for your account.

3. Expect a form 1099R from your old plan. Hold on to it. Even though you don’t have a taxable event, you will need to show the rollover on your next annual tax return.