4 Steps to Properly Handling a 401K Rollover

by Jessica Sommerfield · 1 comment

I recently ended employment with a company I’ve been with for nearly thirteen years. While I haven’t always opted to contribute to the 401K plan my employer offered, I have contributed enough over the years to have a decent start on my retirement savings.

At the same time, I have little investment background or experience on understanding what to do with it! As someone who is still in the middle of learning all of my options, and the intricate differences between types of investments and retirement accounts, I know I can’t go about this haphazardly.

If you’re in the same position, and needing to deal with a 401K, here are a few newbie tips to get you started on the process to transferring your old 401K.

Don’t Cash Out Your 401K

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

The penalty is 10% for early withdrawal and 20% income tax. If this is your only option, it’s not the end of the world. But it should only be chosen in extreme circumstances. You’ll pay plenty of tax, but you can re-invest the funds as you please.

Best case scenario, however, 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, and this also seems unwise unless you’re certain it won’t risk your future security.

Ask Your Account Manager

While I’m also asking for outside opinions, my first step was to talk with a representative from Merrill Lynch, who currently handles my 401K. Set up a time to chat with your current account manager to pick their brain about the best course of action.

I had a great customer service experience with someone who patiently explained what I could expect from the whole process: a 30-day waiting period in which I could give instructions to them about what to do with the funds, some options of which included transferring them to another 401K (not an option for me right now) or rolling them over into an IRA either with Merrill or another company.

Right away, I was impressed with the lack of pressure in our dialogue, so I feel comfortable talking with them again in the future. Since this financial advice is coming from a biased agent, I also plan to ask friends, family members, and other money gurus to see if what I’m being told is accurate.

Compare Fees, Charges, and Restrictions

Depending on which retirement account you’re leaning towards, there will be unique rules to follow. There are even more rules imposed by particular investment companies, which charge varying handling fees. It can all get confusing, but don’t let it intimidate you.

I’m still in the process of comparing, and there are many online resources available to help you compare and contrast different options and financial institutions. Even a beginner can see distinct differences and, with advice, have a hand in their investment decisions.

So take your time, and don’t rush into making a decision about your 401k funds. You want to make sure you understand everything you’re getting into.

Do What’s Best for You

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-saavy 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 @ Penny Thots 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.

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