Employer Retirement Plan Rollover Basics
Figuring out what to do with an old 401(k) has gotten confusing with all the conflicting advice out there. As someone who’s helped friends and family through this process dozens of times, I learned everything there is to know about employer plan rollovers. Today, I will share it all with you.
Here’s the basic situation: you leave a job, and your retirement plan balance doesn’t have to stay behind. You can move it to an IRA or your new employer’s plan. The question is whether you should.
Plans That Can Actually Be Rolled Over
Most employer retirement plans qualify for rollovers. The usual suspects:
401(k) plans – what most private sector workers have. The bread and butter of retirement savings.
403(b) plans – teachers, hospital workers, and nonprofit employees deal with these. Similar rules to 401(k)s but with some quirks.
457(b) plans – government and some nonprofit employees. These have a nice perk where you can withdraw without penalty after leaving, regardless of age.
Profit-sharing and money purchase plans – less common these days, but they roll over the same way.
Your Three Real Options
Leave it alone. If your balance is over $7,000, most plans let you keep the money where it is. It keeps growing tax-deferred, you just can’t add to it anymore. I’m apparently one of those people who finds this acceptable in certain situations – especially if your old plan has great investment options with low fees.
Roll to an IRA. This is the most flexible option. You pick from thousands of investments instead of whatever your employer happened to choose. But IRA quality varies wildly. Some are cheap and great, others are expensive and mediocre. Do your homework.
Roll to your new employer’s plan. Consolidates everything in one place. Some plans have institutional fund classes with lower fees than you’d get retail. And if you ever need a 401(k) loan, the rolled-over money counts toward your borrowing limit.
The Actual Rollover Process
- Call your old plan administrator. Get the rollover forms and understand their specific process. Every plan does this slightly differently.
- Open your receiving account – either an IRA or confirm your new employer accepts incoming rollovers.
- Request a direct rollover. This is the key step. The check should be made out to your new custodian, not to you personally. “Fidelity FBO [Your Name]” – that kind of thing.
- Fill out whatever paperwork both sides require. Sometimes it’s minimal, sometimes it’s a stack of forms.
- Confirm the money arrives. Check your new account after a few weeks. Then invest it appropriately.
The 60-Day Trap
If the check comes to you instead of your new custodian (an indirect rollover), you’ve got exactly 60 days to deposit it into a qualified retirement account. Miss that deadline and the whole amount becomes taxable income. If you’re under 59.5, add another 10% penalty on top.
Probably should have led with this warning, honestly. Direct rollover avoids this entire mess.
