If you are like me you not only need to know all the information involved in doing something, but you also want to see some guidelines so you can assure you are following the correct procedures and are on the right track. It’s easy to question yourself when you are not 100% sure of what you are doing. It is especially scary when you are dealing with your money.

Here are the basic steps you need to take when participating in a direct 401k rollover to a new account. The whole concept of a 401k rollover may sound like a financial nightmare. When it comes to our money we clearly do not want to make any mistakes, but if you are aware of the necessary steps it can make the whole process a lot more calming for you.

1. The first step is deciding where you are going to rollover your 401k. You can open a new account through a bank, brokerage account or a mutual fund. Make sure to contact a few different companies to learn about their terms and fees and get a consultation so that you can weigh your options properly. Do not jump into the water unless you know what’s out there. If you do not feel you can take this on yourself get some advice from a financial planner or tax advisor.
2. Next you want to talk to the company you’ve chosen to roll your retirement money into and ask of them what is required to proceed with a direct rollover. Sometimes you need to have an account already open to move forward and at times the opening of the account may take place at the same time as the rollover. Also make sure to ask them what you need to acquire from or supply to your old provider.
   **Ask your new provider how long this entire process should take assuming things go smoothly. I will explain why in step # 5 submitting the paperwork.
3. The next step is you want to request all necessary forms from your old plan provider. You want to get these papers in your possession as soon as possible so that you can go over them in case you have any questions regarding the forms. In some cases the old provider may require a rollover request form from your new provider. You want to make sure you are aware of all the necessary paperwork upfront so you don’t bounce back and forth and can get answers to all your questions at one time. While you are asking for the necessary forms, you want to check with your old 401k plan to find out what the procedures are so that you can try and avoid and snafus that may occur. Ensure that they have you on file as a terminated employee because if they do not it can hold up the process.
   **Ask your old provider how long this entire process should take assuming things go smoothly. I will explain why in step # 5 submitting the paperwork.
4. Now is the important step of filling out all of the paperwork correctly. It is important that you indicate that this is a direct rollover which will ensure that the funds are paid directly to the new account. If you have any questions with the forms make sure to call the applicable company, whether it’s your new or old provider as not filling in the paperwork correctly could hold up the process. Even if it seems like a minor question like checking a box, make sure to call. There is no such thing as a dumb question when it comes to rolling over your retirement fund. If you do not feel comfortable filling out this paperwork yourself, hire a professional that can help you with this process. Spending a little money now to ensure that this process goes smoothly is a wise investment.
5. The last thing to do is submit the appropriate forms to the correct provider, new or old. Once you’ve filed the paperwork this isn’t a set it and forget it situation. You want to make sure that you follow up with both providers to make sure that everything is moving along smoothly. Sometimes there can be an issue that is holding up the transfer and you won’t even know about it. You have to remember your old provider does not want your money to leave their hands so if there is a hiccup in the process they may not tell you as quickly as you would have liked. You have to be your own advocate in this situation to make sure all things are taken care of. Remember when I told you to ask both your old and new provider how long this process should take? Their answers should be relatively close and if they differ greatly go with your new provider’s time-line as your old provider may say longer because they do not want to part with your funds. If your providers stated that this should take about two weeks contact them halfway through to ensure everything is moving as planned or if there is any required information needed. This is not a case of no news is good news!

In most situations a check for the amount of the rollover will be sent to you via snail mail. Find out how long it will be for you to receive the check so you can keep an eye out for it. If you do not receive it in a certain amount of time you will want to contact the company in case you need to put a stop on the check and have a new one issued. It is your responsibility to deposit this check into your new account. When you receive the check make sure it is filled out correctly and submit it to be deposited with the appropriate forms. Don’t take your time depositing this check as it is not something you want to forget about or worse, lose.

Remember, it is important to stay on top of this process. It is your retirement money that is at stake after all.

A great thing about 401k’s is that most companies these days have them.  Why this is good news for you is because if you decide to leave your current employer and your new employer has a 401k plan you will most likely be able to rollover your 401k into their plan easily. Before this used to be a difficult process but with some recent government regulation changes it has become a lot easier to roll your money over.  Not only does this prevent you from having multiple retirement accounts all over the place but you don’t have to mess with the difficulties of managing all of your investments and making sure they are organized properly.

There are some benefits to a 401k rollover to a new employer as opposed to rolling over to an IRA.  This all depends on the options that are in your new employer’s 401k plan.  To invest in an IRA or single mutual fund in most cases you need a minimum investment.  So if you do not have a lot of money in your 401k it will be more difficult to diversify those funds. With a 401k rollover into a new employer’s 401k plan there are generally no investment minimums so it doesn’t matter the amount of money you have in your current 401k.  This means you can diversify a lot easier with a 401k and this is a big benefit!

As stated before there are some drawbacks with a 401k rollover into a new employer’s 401k investment plan.  The main drawback is that you have limited mutual fund investment options.  You are basically stuck with the investment choices that your company selected so there isn’t a lot of flexibility. You won’t have access to any of your funds unless at some point you want/need to take a loan from your 401k, if this is even permitted by your company, or your employment with the company is terminated.  Another drawback is that you could be paying higher fees with a company 401k plan as opposed to an outside plan.  Often times the smaller the company the higher the fees.  Make sure to check out all this information when you get your 401k packet.

If you decide that a 401k rollover to your new employer’s plan is the best option for you, have your current 401k plan transfer your funds directly to your new employer’s retirement plan.  Once the proper paperwork is completed your money is moved directly to your new retirement plan and the money never crosses your path. This is a pretty seamless process and you will be back on your way to growing your tax deferred retirement savings without any interruption.  Ensure that when you directly roll over your 401k funds that you are following federal rollover rules and this will ensure no federal income tax will be withheld from you. Sometimes your old retirement plan will mail you a check and it will be made payable to the custodian of your retirement plan or the trustee.  If you receive a check like this don’t stress about it.  This will still be considered a direct rollover.  You just need to get the check to the institution acting as the trustee of your new retirement plan. If you are unsure of the best option for you or have questions about a direct rollover to your new employer, consult a professional for advice.

Are you considering a cash distribution instead of a 401k rollover?  Well, I am going to be brutally honest in saying unless you are absolutely desperate for money or over the age of 59 1/2, you would be crazy to cash out and should go with a 401k rollover plan!  I do realize that a cash distribution is the most tempting option available for you to take but it can also be the most costly.

If you leave a company and decide to physically receive a part of or all of your 401k assets, this is considered a cash distribution. You may think, “This is my money so I will take it and run”, and the truth is, yes, you can take the money and run but not without paying some hefty taxes first.  State and federal income taxes will take a portion out of your distribution.  When you made the contributions to your 401k you probably did so with pre-taxed dollars.  Your employer contributions were also tax deferred.  When you go with a cash distribution you pay income tax on all pre-taxed earnings. Then there is a mandatory withholding of taxes of 20%.  Yep, you read that right, 20%. So if you had $50,000 in your retirement account and you cashed out your distributions you would pay $10,000 in taxes that your previous employer must pay to the IRS.  If you are still considering this, you also may have to pay a 10% penalty called a premature distribution for withdrawing from the account if you are under the age of 59 1/2 at the time you decided to leave the company.  Essentially if you had $50,000 you would have to pay $5,000 for penalties.  So if you add all the taxes you will pay your $50,000 is now $35,000 or less all because you cashed out early.

Unfortunately, the only benefit to this option is that you have hard cash in your hands now, rather than later.  So if you are in a financial crisis, and by crisis I mean serious medical injuries or tying to save your home, not buy a new wardrobe, then this would be a good option for you to take if you are willing to take the big financial hit.  We all know the tax man is going to get any money he can from us but this is also to deter you from withdrawing early.  The point of a retirement savings account is so that it can continue to grow and earn you money so you can one day retire.  If you withdraw early you have now taken a big chunk of that money and thrown it away.  Please think about your options and look into the 401k rollover plans available whether it’s a 401k rollover to IRA or 401k rollover into your new employer’s retirement plan.  A cash distribution option is not something to take lightly. The money in hand seems nice but you will miss it greatly when you are retired! You may need to seek the advice of a tax adviser if you are still unsure about taking a cash out or if you need a third party to help you decide whether this is your best financial option.

Summary:

• Cash Distributions are only a good idea if you are in a financial crisis and need the money.  Speak with a tax advisor or 401k professional to determine if this is your best option.
• You will get dinged quite a bit by the tax man for cashing out early
• If you are unsure of what to do with your money, leave it in your current 401k plan until you have done some research or consulted with a professional regarding your next move