How to Roll Over a 401k

Rollover your 401k rather than cash it out.

Performing a 401k rollover correctly can save you thousands of dollars. Unfortunately, statistics indicate that a large proportion of people simply cash out their 401k, costing them unnecessary taxes and IRS penalties.

Instructions

1. Review your rollover options. After you leave your job, you should receive a packet in the mail from your 401k plan provider describing your options for your 401k rollover. These options depend on your plan and the amount you have invested. Commonly, you can cash out, move the money to another 401k, move the money to an IRA or leave the money in your existing plan. Your best bet is a "Direct" rollover from your old account to a new one.

2. Contact your previous 401k plan provider and confirm that you can rollover your 401k directly into your new employer's plan, or directly into an individual plan without incurring any fees or penalties for withdrawing your 401k money from their institution.

3. Obtain the required paperwork from your previous 401k provider to request the direct rollover.

4. Contact your new provider and see what you need to do to have your money rolled over into an account with them. You need to open an account with the new provider and designate how you want to invest your 401k money.

5. Fill out the paperwork required from both institutions to direct them to perform the 401k rollover. Take your time, and make absolutely certain that you are filling out the information accurately and properly.

6. Submit your paperwork for the rollover to each institution.

7. Follow up -- this is perhaps the most important step -- with each institution to confirm that they received the paperwork and will complete the rollover within the allotted time frame, which is 60 days.

Tips & Warnings

• If you are moving to a new job with a good 401k, consider rolling your 401k from your old employer's plan to your new employer's plan.

• You can also move your money into an IRA (or Roth IRA if you have after-tax Roth contributions). Many investment advisers like this option because it gives you the most control over your money. You can choose the IRA plan provider you like best -- that which gives you the best investment choices for your situation.

• A 401k rollover is a significant financial decision and should be performed only after thorough research or seeking financial advice.

References

• IRS: Publication 590 (2010), Individual Retirement Arrangements (IRAs)