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.
- To transfer old 401(k)s to an IRA, start by choosing one well-established custodian, such as Vanguard, Fidelity, or Charles Schwab.
- 401(k)s, 403(b)s, SEP accounts, SIMPLE accounts, KEOGHs, Individual 401(k)s, and some 457 plans can all be transferred into one IRA.
- If you have after-tax contributions in your 401(k) or other retirement accounts, those can usually be transferred into a Roth IRA.
- If your retirement plan mails you a check, the IRA rollover must be completed within 60 days, or it will be considered a taxable distribution.
Pick the Financial Services Company You Will Work With
You will want to pick one firm that 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. That is not true. You can open an account at one company, and inside that account spread your money across multiple types of investments.
Using a well-established custodian helps you 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.
Learn Which Type of Retirement Accounts Can Be Combined
The most common types of retirement accounts can be transferred into one IRA and one Roth IRA. 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 that you understand the 401(k) retirement age rules before you decide to move money out of a 401(k) plan.
401(k)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 72, you are required to take a minimum withdrawal amount, and that 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. Alternatively, you may find it advantageous to convert a portion of your pre-tax 401(k) contributions to a Roth IRA. Doing so will trigger an immediate tax bill, but future tax-free growth may position you better for the long-term. A financial advisor and/or tax professional can provide some guidance on that front.
In some situations, you can enter retirement with three accounts or fewer: one IRA, one Roth IRA, and one regular brokerage/savings/mutual fund account that is not a specific type of retirement account.
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 that you will be transferring a 401(k) or another retirement account into that IRA.
Next, contact your old employer or retirement plan administrator (look on your retirement account statement to find contact information), and let them know that you would like to roll your 401(k) money over to your IRA. They probably will send you paperwork that you must complete. Some companies will process the rollover via phone if you provide them the new custodian's 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 your new IRA custodian. Ask whether they offer that option, and if they do, it may be best for you to let them send the funds directly.
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 will match up with the expected withdrawals you will need to take.
For example, if you know that 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 won't have to worry about that part of your account being worth less than $20,000 when you need it.
The Balance does not provide tax, investment, or financial services or advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Investing involves risk, including the possible loss of principal.