The 401k Rollover Process Explained

Going through a 401k rollover is something that many people will have to go through in their lifetimes. When you work for an employer with a 401k, the probability that you will work for them until the end of your career is not good. Chances are, when you move on to another job or become self-employed, you will have to do something with the money. If you simply terminate the 401k account, you will have to take a 10% early distribution penalty and pay income taxes on the money. Therefore, a 401k rollover makes a lot more sense financially. You can move your account to another 401k program or an IRA. Here are the basics behind the 401k rollover process explained.

Find a Broker

The first thing that you'll need to do in order to roll your 401k into an IRA is find a broker. Finding a good broker is essential to the integrity of the account and safety of your funds over the long term. Going with a large, well-known company can help you make sure that the company will be around for the long-haul. Check out all of their procedures and fees associated with an IRA. These fees can add up if you make enough transactions. Try to find the best deal on your IRA with a company that offers many investment options. This will allow you the flexibility that you need to invest freely.

Start the Rollover Process

Once you decide on a broker, you will have to initiate the rollover process. You will need to talk to your new broker and ask them what to do. Most of the time, you will start by filling out an application for a new rollover account. This is a slightly different application than you will find for a regular IRA account. Make sure that you fill out the application correctly. Many times, the application can be confusing and require a great deal of information. Just take your time and fill out everything properly. Avoiding errors can help save you time and money in application fees.

Also, keep in mind that if you are married your spouse will also be required to sign and notarize all forms. 401k accounts are considered community property and you must both acknowledge any movement.

Transfer the Money

After you have filled out the necessary paperwork, your application for a new account will be approved. From there, you can go onto the next set of forms that need to be filled out. They will be slightly different for each broker, however, the basic idea is the same. You need to ask them for a transfer of funds form and then start filling it out. Again, this is an area that you want to take your time with.

In most cases, the new broker will require proof that you own the other 401k account in the form of a recent statement. Include this statement with the transfer form and give it to the new broker that holds your IRA. The new broker will usually take care of the rest. They will contact your old broker for you and request that the money be transferred. It is now up to you to start investing the money with your new options in the IRA account.



Automatic Rollover



An automatic rollover is a transaction that takes place when a 401(k) provider rolls over the existing balance of a 401(k) account to an IRA. For this type of transaction to occur, the 401(k) provider does not necessarily need the permission of the account holder. In most cases, this type of transaction occurs when an individual leaves a company in which he or she had a 401(k) account. Instead of cashing out the account and creating a taxable event, the 401(k) provider opts to put the money into an IRA for the individual. The 401(k) provider takes the time to set up the IRA for the individual. 

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