I recently received this email question from a reader who asked that I not use her name:
I have about $42,800 in a 401(k) with my former employer that I want to rollover into an IRA. I really don’t know where to start. I also have a 401(k) with another $1,200 at another job. I had completely forgotten about that one until I got a letter about it from the new administrator. What should I do? How do I rollover my 401(k) into a Roth IRA?
First, congratulations! You’ve obviously done well and have taken advantage of some smart investing opportunities. The good news is that the steps to rollover your retirement funds to an IRA (Roth or traditional) is a relatively fluid process but I should tell you up front that I’m not a financial planner (get matched with one at Wiser Advisor). That being said, if you want to complete a rollover to an IRA from your old employer’s 401(k) plan, here are the steps you need to take (and they aren’t difficult at all):
How to roll over a 401(k) into an IRA
1. Decide where you want to have the new IRA
You have a LOT of choices here. I personally use Scottrade since they have no fee IRAs and commission free ETFs but you could also go with:
- optionsXpress (a Charles Schwab company)
- a traditional brokerage (yuck)
- a traditional bank (yuckier)
2. Inform your new brokerage that you want to open a new IRA account
Make sure your new brokerage firm understands that you plan to complete a rollover from a 401(k). They may have “rollover specialists” that can assist with the rollover and make sure everything happens the way you want.
3. Get the necessary 401(k) rollover paperwork from your former employer
Once the new IRA account has been created (although it won’t have any money in it yet), get the paperwork from your 401(k) provider to distribute the funds.
4. Complete the necessary paperwork
On your 401(k) distribution paperwork, specify that you wish to distribute the funds DIRECTLY to your new IRA, and indicate your new IRA provider’s information. It is vital that you specifically request the funds be sent DIRECTLY to your new IRA provider – if they come to you, a portion of the money will be withheld for taxes and this can create other complications for your rollover. If your old 401(k) provider insists on sending you a check, have it made out to the new brokerage firm with your name and brokerage account number in the memo field of the check.
Under NO circumstances should you deposit the check into a checking account and then expect to fund your IRA. You will be taxed on those funds!
5. Fund your new IRA with your old 401(k) money
After you submit your 401(k) paperwork, your funds should be sent directly to your new IRA provider and you can then invest them. The distribution process will typically take anywhere from about one to four weeks, depending on your 401(k) plan provider that’s doing the distribution.
Once you’ve opened and funded your new IRA, there are a host of investing options available. You can: