How to Roll Over Your 401(k)

Take Advantage of the Clear Tax Benefits of a Rollover

by Benjamin Roussey

A person who has prepared for the future is perhaps the wisest person on earth. Most people choose to sign up for a 401(k) account, which is a type of retirement savings account. These accounts divert a small part of your wages directly into a 401(k), normally administered by the person’s employer. The interest earned on this money is not taxed until withdrawn. Employees choose where this money will be invested, which is typically a mutual fund.

The Clear and Apparent Tax Advantages

You can choose to withdraw the money in your 401(k) account when you leave your job. However, if you do this prior to reaching the age of 59 and 6 months, you will be penalized 10% of the savings for early withdrawal. Even after the requisite age, the combined federal and state taxes could set back the investment savings by as much as 35 percent. This is perhaps the reason why you should consider converting your existing 401(k) account into another investment account, such as the Traditional IRA or Roth IRA account. This movement to the IRA is called a rollover. Switching over could lead to lower investment expenses and access to a much larger variety investment options while simultaneously saving your taxable income.

Rollovers, One Step at a Time

• Before doing anything, check your old 401(k) provider (usually your old employer) for any hidden fees. Also ensure that their systems list you as a terminated employee. Clearly inform them that you wish to rollover and request that they send you any paperwork and forms which will be required later.
• In case that you are terminating your current employment and wish to rollover your 401(k) account to an IRA, you would be required to fill out IRS form 1099-R. This form is used to initiate your 401(k) funds, and typically takes 60 days from the date the order was placed.
• Make sure that your old investment provider writes the check payable directly to the new investment firm you have chosen, which is called a trustee-to-trustee rollover to avoid the automatic 20 percent tax withholding.
• Open a rollover Individual Requirement Account (IRA) if you do not have one where after the 60-day period, the money would be transferred. This rollover IRA would allow you to continue earning high interest on your investments under tax-deferred conditions. The IRA account should be opened by either a brokerage firm or a mutual fund company.
• When the transfers are complete, you will be required to fill out IRS form 5498.
• The money which is transferred needs to be invested to earn the advantages of an IRA. These plans depend upon the company in which you are investing, so make sure to read the broker portfolio completely.

Your Responsibility

The choice to rollover your 401(k) account depends entirely upon you. Before investing, make sure to thoroughly review the investment company’s portfolio. Do not assume anything or take anything for granted.