How to Perform a 401k Rollover

A 401k rollover is a financial transaction in which you move your 401k retirement savings into another account. You may be doing it because you lost your job or are changing employers. You may also be doing it just because you don’t like the 401k plans that your current employer offers. Either way, the most important piece of information is that there are ways of rolling over your 401k without sacrificing the tax benefits that you previously enjoyed. It wouldn’t make any sense to spend years building up your retirement savings and then losing a big chunk of that to extraneous taxes. So you need to make sure that you know what you’re doing in order to avoid this. There are several different methods for performing a 401k rollover, and each of them has certain advantages and disadvantages. In the next section I will cover the different methods in detail so you know which one is right for you.

Direct 401k rollover

1. The first and most common type of 401k rollover is the direct rollover. This means that your current 401k provider coordinates directly with the provider of your new retirement plan. This can be a 401k from a new employer or an IRA with a separate financial institution. This is a very straightforward process. You will probably just need to fill out some paperwork and then leave it up to them. The most important thing to do with this process is to make sure that your old 401k provider knows that you want a direct rollover so they don’t end up sending you the check for the balance in your account. If they do send you a check, make sure you do not deposit it. Just send it back and let them know about the problem. Depositing the check would lead to an indirect rollover situation, which I will describe next.

Indirect 401k rollover

2. An indirect 401k rollover is when your old 401k provider sends you the money from your old account to you, and you then deposit the money into a new retirement account. You have 60 days to complete this transaction before the money you received is counted as income, which will probably be taxed at a higher rate than it would be if those taxes were delayed until retirement. Also, when the old provider sends you the check, they will probably withhold 20%. That means that when you deposit this in your new account you will have to make up for that 20% to avoid subjecting it to income taxes, so you’ll need some disposable cash on hand in order to avoid a financial loss.

Cash Distribution

3. The third method (which isn’t really a rollover) is called a cash distribution. This is exactly what it sounds like. Your old 401k provider sends you a check for the balance and that’s it. The problems with this are the same as the possible problems that come with an indirect rollover. They will withhold 20% of the balance when sending you the check, and this money will be taxed as income (which will likely bump you into a higher tax bracket). You will also probably be subject to a penalty for early withdrawal, which makes this the least beneficial method of closing out your old account.

A financial advisor can be helpful for certain difficult parts of this process. The most important thing that they can do for you is help decide where to deposit your savings. They are a myriad of options available from many different financial institutions, and it can be impossible for the average consumer to differentiate between them. Financial advisors know what the options are, and can help you choose the best one, as well as help you fill out some of the paperwork.

There are several different types of financial advisors who can help you in different ways. The most important aspect of a financial planner is that they have fiduciary duty. This means they are responsible the decisions they make, and they must make those decisions for your benefit only. They cannot make transactions simply to collect a commission, and are most likely compensated by fee rather than commission anyway. The CFP (Certified Financial Planner) license is the most thorough, and CFP’s are required by law to register with a regulatory agency and are bound to a fiduciary duty for their clients. These individuals can be found on the CFP website directory.