How to Transfer Old 401(k)s to an IRA
This is an easy process once you know how it works!
As you get near the point where you will need income from your retirement accounts, it is likely you will want to transfer old 401(k)s to an IRA to simplify the process of managing your retirement money.
Many people are not aware that they can combine most of their retirement accounts into a single IRA. (Spouses cannot combine their retirement accounts together.)
If you have a 401(k) plan that you need to transfer to an IRA here are the four steps to take.
1. Pick the financial services company you will work with
You will want to pick one firm who will serve as the custodian for your retirement account(s). If you manage your own investments you might pick Vanguard, Fidelity or Charles Schwab. If you work with a financial advisor, they will have a brokerage firm or custodian that they use and will open the account(s) you need there.
Some people mistakenly think they need to spread their money across multiple companies to be diversified. This is not true. You can open an account at one company, and inside that account spread your money across multiple different types of investments.
Using a well established custodian helps protect your accounts from numerous types of fraud, and having your money with one firm makes managing your retirement money and retirement distributions much easier.
2. Learn which type of retirement account can be combined
Most common types of retirement accounts can be transferred into one IRA account, and one Roth IRA account. For example, once you have left your employer, you can move your 401(k) to an IRA (this is called a rollover).
When you move money from a 401(k) to an IRA using an IRA rollover there are no taxes due, as it is considered a direct transfer from one type of retirement account to another. In your new IRA you'll pay taxes only as you take withdrawals. If you are between age 55 and 59 1/2, make sure you understand the 401(k) retirement age rules before you decide to move money out of a 401(k) plan.
401k()s, 403(b)s, SEP accounts, SIMPLE accounts, KEOGHs, Individual 401(k)s, and some 457 plans can all be transferred into one IRA account. Having everything in one account makes it easy to update and change beneficiaries, manage investments and take withdrawals. When you reach age 70 1/2 you are required to take a minimum withdrawal amount, and this can be challenging to manage if your accounts are spread out.
If you have after-tax contributions in your 401(k) plan or other retirement accounts those can usually be transferred into a Roth IRA account.
In some situations you can enter retirement with three accounts or less: one IRA, one Roth IRA, and one regular brokerage/savings/mutual fund account that is not a specific type of retirement account.
3. Establish an IRA rollover account
First you must have an IRA account opened and an account number. You can open an account with your chosen financial institution without putting any money in; just let them know you will be transferring a 401(k) or another retirement account into this IRA.
Next, contact your old employer or retirement plan administrator (look on your retirement account statement to find contact information) and let them know you would like to rollover your 401(k) money to your IRA account. Most of the time they will send you paperwork that you must complete. Some companies will process the rollover via phone if you provide them the new custodian information and your IRA account number.
Many retirement plans insist on mailing the check to you, and it will be up to you to quickly get it to your new IRA custodian. The IRA rollover must be completed within a 60 day time frame or it will be considered a taxable distribution.
Some retirement plans will wire the funds or mail them directly to you new IRA custodian. Ask if they offer this option, and if they do, I suggest you let them send the funds direct.
4. Choose investments in your IRA
Once the money is consolidated into one account, you can choose what types of investments belong in that account. Make an investment plan and make sure the investments you choose match up with the expected withdrawals you will need to take.
For example, if you know you will need to take $20,000 out next year, you don't want that $20,000 invested in something aggressive, risky or volatile, like a stock fund. You want it in something safe so you that you don't have to worry about that part of your account being worth less than $20,000 when you need it.