Rolling over Your 401(k) – How to

The 401(k) is the modern day equivalent of the pension plan with advantages such as employer matching and pre-tax dollars going into the account. Many employers offer the 401(k) plan to employees, both to entice new hires and help existing ones to save money for their future. 401(k)s differ from pensions in that they can be carried with an employee all the way through her working years via a rollover. Many employees don’t realize that it is possible to transfer their earnings into a new account with a new employer, keeping their retirement earnings alive. We at PaydayLoansCashAdvance have gathered together the information you need to roll over your 401(k).

Understanding the Tax Implications of the 401(k)
The first time anyone starts investing in a 401(k), she is told that the dollars she puts into the fund are what are known as pre-tax dollars. What this means is the money that goes in is taken from her gross earnings, before federal and state taxes are deducted. This does not mean that the IRS never takes a share of the funds, however. The IRS takes a cut when the fund owner has reached the age of disbursement (59 1/2) or has a hardship requiring them to take money out of the fund.

The implication here is one of don’t break the 401(k) fund before maturity unless absolutely necessary. The IRS takes a 20 percent hit out of the total amount, leaving you with much less money than you may think you would be receiving otherwise. It is far more preferable to roll the account over into a Roth IRA or transfer it to the 401(k) brokerage at your new job.

The Steps You Need to Take When Rolling Over your 401(k)

  • First Step: Before moving forward, you need to look back. Check with your old employer to determine if your 401(k) is eligible for rollover. You want to make sure that the employer has changed your status to ‘terminated’ with the fund. If this change has not been made, you will not be able to transfer your funds into the new account. You also want to check to see if there are any fees to be incurred if you do the transfer. These two issues are up to you to resolve as it is your fund for investing, and no one is going to tell you anything until you ask. Once you know your account is clear, you can move onto the next step.
  • Request Forms: Request the necessary forms for rolling over your investment. You need to obtain these forms from your former employer’s account administrator. You may or may not need them, but that is dependent on your new account provider’s policies. It’s best to have all of the information beforehand and not need it rather than having to scramble for it later.
  • Ask Questions: Find out what the new provider needs from you. Every brokerage is different in how they handle opening up a new account, and it is up to you to find out what is needed to do so. Some brokerages require that you open up a separate account before rolling over the 401(k), others use all-inclusive paperwork that covers all of the bases at once.
  • Fill out Forms: Complete and submit the forms properly. Most likely you will be asked the question of what type of distribution you are doing. Make sure that you select Direct Rollover on the form. This is to ensure that the transfer of funds goes directly from brokerage to brokerage while keeping your name out of the equation. If you have questions about the forms, don’t hesitate to call the brokerage. It’s better to ask questions then throw a dart and hope you’ve answered the questions properly. Avoid mistakes at all costs and take the time to make a call.
  • Follow up: Always follow up on the transfer. It typically takes 60 days for a rollover to complete, but brokerages are known to make life difficult over a little mistake on the paperwork. Stay on top of the transfer to make sure that you make any necessary corrections. Also make sure that the brokerage wrote the transfer check out properly (IE to the new brokerage) instead of to your name in order to avoid a tax penalty. This is the part where the process can go off the rails, so make sure to follow due diligence. After all, this is your investment that you are shepherding through the process.

All relevant tax forms will be filled out by the brokerage and sent to you for tax purposes. One of the forms is a 1099-R, which is for distributions from retirement accounts. This is why it is important to ensure that the distribution was made out to the fund and not to you, as you may be liable for the taxes on the distribution even though you never saw the money.

Rolling over your 401(k) can seem like a daunting task, but you benefit greatly by taking the time to do it. Your investment keeps growing, providing you much needed security for your retirement years. You also gain experience on how the process works for the next time you have to rollover your 401(k), whenever that may be.

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