How to Liquidate a 401(k) to Rollover Into an IRA Using an FBO

A trustee-to-trustee funds transfer from a 401(k) to an IRA is without tax consequences.

When an employee leaves a company where he has a 401(k) account balance, he must decide how to handle the existing account balance. The employee has two options to roll over the 401(k) balance to an individual retirement account without tax consequences. He can request a direct trustee-to-trustee funds transfer or arrange for the trustee-to-trustee transfer using a check issued to the IRA custodian but delivered to him. In the latter instance, the payee on the draft is not the employee but rather the IRA custodian. The payee takes the form of “IRA Custodian FBO Individual,” where “FBO” means “for the benefit of.”

Things You'll Need

• 401(k) account statement
• IRA information
• 401(k) election form
• IRA deposit form

Instructions

1. Obtain information from your employer's benefits office regarding the distribution of funds in your 401(k) account. Request information from this office regarding a “trustee-to-trustee transfer” using a draft. Obtain the necessary form to complete this transaction.

2. Acquire information from financial custodians such as a brokerage firm or financial services institution regarding the creation of an IRA for a trustee-to-trustee transfer of funds from a 401(k). Consider any limitations imposed by individual institutions regarding an IRA or the transfer of funds between institutions using a check issued to the IRA custodian.

3. Review IRS information regarding a trustee-to-trustee transfer of funds from a 401(k) account to an IRA using a draft issued to the custodian. Pay particular attention to the requirements of this form of transfer as well as the tax benefits of the transfer.

4. Create a new IRA account with the financial custodian of your choice. Obtain account information required by your employer's benefits office to make the trustee-to-trustee transfer of funds. Collect the IRA deposit slip required for the transfer and the address to which the IRA deposit should be sent.

5. Complete the 401(k) election form and submit it to your employer's benefits office. This election form will provide your employer the necessary information to create a draft for the transfer of funds from your 401(k) account to your new IRA account and forward the draft to your address.

6. Deposit the draft for your 401(k) balance to your new IRA account. Complete the IRA deposit slip and forward the slip and the draft to your IRA custodian.

Tips & Warnings

• In the event the transfer of funds is not reflected in your IRA account balance within one month’s time, contact the account custodian and your former employer to determine if a problem occurred in the funds transfer.

References

• Pass the 6: A Training Guide for the FINRA Series 6 Exam: Robert Walker
• Internal Revenue Service: Publication 590, Individual Retirement Arrangements
• Internal Revenue Service: Topic 424 -- 401(k) Plans
• Internal Revenue Service: Topic 412 -- Lump-sum Distributions
• Internal Revenue Service: Topic Topic 413 -- Rollovers from Retirement Plans