4 Steps to Properly Handle a 401K Rollover

by David@MoneyNing.com · 2 comments

Just as you thought you had everything together financially, something unexpected happens that reminds you to keep looking for improvements.

A few weeks ago, we got a mailing from a 401k custodian claiming that they are holding Emma’s 401k that was rolled over to them years ago. My first thought was that this was some type of a scam, but then they have my wife’s name, the old employer where she worked, and other personal details. The crazy thing was that Emma hasn’t worked for a corporation other than our own company in over 10 years. In fact, the employer that supposedly transferred the money went out of business more than a decade ago too.

The other thing I thought was incredible is how they even found our address. After 10+ years, we’ve moved three different times. What kind of automated systems do they use to track the current address of their clients? None of this matters though. You don’t say no to money, especially when it’s yours. And who knows? Emma might have set aside a sizable amount years ago, or she might have luckily picked some investment that went ballistic. Thinking of either possibility got me a little excited. I logged onto their website, figured out how to create an ID, and looked at the account balance – a little under $1,000. Not incredible, but decent.

I realized then that the amount might have been quite a bit higher if we actually had that money rolled into our other investments and invested all this time. But that’s water under a bridge now. What I need to focus on is to transfer the sum out and combine the amount to the rest of our retirement assets. I haven’t done a rollover in years, but I remember there were a few gotchas, so I did a little research to refresh my memory. If you’re in the same position and need to deal with a 401K, here are a few tips to get you started on the process to transfer your old 401K.

Don’t Cash Out Your 401K

If there’s any advice I’ve heard more than a few times when it comes to retirement savings, it’s that you should rarely ever cash out your 401K.

The penalty is 10% for early withdrawal. Plus, you have to pay taxes on the full amount as if you somehow earned that income all in one shot. If this is your only option, it’s not the end of the world. The CARES Act lets you withdraw up to $100,000 penalty-free in 2020 if you were affected by the virus. You still need to pay income tax on that amount though, so it should only be chosen in extreme circumstances.

If you can afford to, it’s better to either leave these funds where they are or transfer them into another tax-advantaged retirement savings plan. Some people borrow from their retirement savings. This is also unwise unless you’re certain it won’t risk your future security.

Talk to Your Account Manager

You’ll get good information from the representative that handles your current 401K or IRA. Set up a time to chat with your current account manager to pick his/her brain about the best course of action. If you want to transfer the money out of the 401k into an IRA, make sure you speak with someone at the receiving firm as well. Take your time and ask every question you can think of. You’ll find that the rep at the receiving firm is especially patient because he/she has a vested interest in helping you bring the assets over. I’m planning to send the money into an Etrade account. After I spoke with a rep at Etrade, they mentioned that I should have the 401k make the check out to “E*TRADE Securities, FBO ” with the account number on the front.

One thing to note here is that you don’t want the check to be made out to you. In theory, you have 60 days to transfer the money to the brokerage firm even if the money is made out to you. In fact, some people use this opportunity to get an interest free loan for two months. But it’s too tempting to just use the funds if you see a giant check made out to you. Why risk spending some (or worst, all) of it?

I can also ask them to mail the check directly to Etrade. That way, I won’t have to drive over to a branch to hand the check over. Emma’s 401k account balance is small so this doesn’t concern us as much this time around. But it would make me nervous if, say, the check was sent to us first and the check is of an amount in the millions because she has worked at a company for decades and amassed a huge nest egg there.

Don’t Forget About Transfer Bonuses

We won’t qualify for any bonuses because the amount we are transferring is small, but there are plenty of promotions that award free cash for those who are transfer funds to the major brokerage firms. The best part is that money will be credited to the retirement account if you are transferring pre-tax funds, so the sum will be tax-sheltered until you withdraw money for retirement. The amount also doesn’t count towards your annual maximum contributions either. It’s free money.

So search the web for some offers. Even if the firm you want to transfer money to doesn’t offer any, it’s a good idea to ask the rep if they’ll match funds. In my experience, most firms will offer to match whatever offer is being advertised by a competing firm even if they themselves aren’t promoting any bonuses. It certainly doesn’t hurt to ask.

Do What’s Best for You

We already have our investment strategy figured out so it’s just a matter of moving the money in that account to our main pot of retirement assets. If you are just building something up, then take your time to figure out how you want this money invested. Just because someone you know is investing using a certain method, or with a specific company, doesn’t necessarily mean it’s the right option for you. Look for advice geared toward people in your age bracket, your income level, and your experience.

Those who are more investment-savvy will be comfortable personally handling their funds, but if you don’t know what you’re doing, you could make some serious financial mistakes.

The best advice is to take the best from all perspectives: listen to the advice of others, consult the experts, but ultimately – do what’s right for you.

Do you have experience rolling over an old 401K? What’s another step that should be taken during this process?

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  • Jon says:

    We just rolled over my wife’s old 401k to her IRA. We had to cash it out to transfer it, but that is fine because it was in high cost investments. I can invest the money now in much cheaper options.

    We also opted to have the check go right to the new custodian. We didn’t want to risk getting the check and misplacing it/losing it and getting hit with the IRS penalty by not investing in with 60 days.

    • David@MoneyNing.com says:

      Having the check lost in the mail and then getting hit with the penalty would suck.

      Even if you end up sorting it out with the IRS, I bet the whole ordeal would be a pain to deal with.

      Good point Jon.

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