Gone are the days when someone worked for the same company for 40+ years before retiring with a pension, fancy pen, and maybe if you were lucky a gold watch. Today, the average 50-60 year old has had about 12 jobs over the course of their working career.
With changing jobs comes a trail of old and sometimes forgotten retirement plans, typically a 401(k). These orphaned 401(k)s shouldn’t just get left behind – it’s your money and some could even have thousands of dollars in them.
Enter the 401(k) rollover.
A rollover is simply transferring your retirement savings from one retirement account to another without having to pay taxes on the money you are rolling over.
The 401(k) rollover is the most common. It lets you transfer money from a 401(k) you had at a previous job into an IRA or the 401(k) at a new job.
Direct vs. Indirect Rollover
Once you’ve made the decision to do a rollover, you have a choice between direct and indirect.
A direct rollover is when you transfer money in one retirement account, like a 401(k), directly into another retirement account, like an IRA. You never touch the money, so you won’t have to pay any taxes or penalties on the money being transferred. This is the most common and simple method to use.
Indirect rollovers are a bit more complicated because instead of the money going straight into your new account, the cash goes to you first. You then have 60 days to deposit the funds into a new retirement plan or you will need to pay withholding taxes and early withdrawal penalties.
How do I roll over my old 401(k) into an IRA?
Once you are ready to do a 401(k) rollover, it’s pretty simple. Of course, you should always talk to a finance or tax professional beforehand, but it’s typically the following 4 steps:
- Decide between a traditional or Roth IRA. If you aren’t sure of the difference, you can learn more about them here.
- Open the IRA account. You can choose a brokerage firm or even your local bank. It’s usually as simple as filling out a form. If you have an investment professional, they can help guide you.
- Request a direct transfer rollover from your old 401(k). You’ll need to contact the plan administrator of your old 401(k) who will give you directions forms to complete and information is needed to transfer the money to your new IRA.
- Choose your investments. Once you have the money in your IRA it’s time to pick your investments! Not sure where to invest, consider consulting with a professional as there are 4 main types of mutual funds, growth, growth and income, aggressive growth, and international, but thousands of funds to choose from.
Need help opening up a new IRA, give us a call or stop by any of our conveniently located branches!
Stephen Yonych Jr.
Assistant Vice President, Watertown Manager