When I left my previous employer, I had four options for my 401k retirement account. I could leave the money in the employer’s account, I could withdraw the money, I could transfer the funds to a new employer’s retirement account, or I could roll the money into an Individual Retirement Account (IRA). I rolled the value of my 401k and Roth 401k into their respective IRA counterparts in order to gain full control over the money and to avoid early withdrawal fees. This is how.
401k Rollover to IRA (Roth & Traditional)
When I initially set up my employer-sponsored 401k, I elected for my contributions to be after-tax (Roth) contributions. Any employer match provided is considered pre-tax (traditional). Within my 401k, it showed as two sub-accounts (Roth & traditional). The rollover for each should go into the corresponding IRA. Roth 401k to Roth IRA and Traditional 401k to Traditional IRA.
Step 1: Open a Roth IRA account
A month prior to leaving the company, I set my contributions to zero. Part of my pay is commission-based, and I knew they would pay out my commission over the next few months after leaving. If I was still contributing during this time, I would not be able to roll my funds over until 30 days after the last contribution was made. This may be unique to my 401k plan, but it’s an important factor to consider.
I use Charles Schwab for my Roth IRA and easily added a traditional IRA account from within the same login as my Roth IRA. This is convenient for me and makes it easy to self-manage multiple accounts. It’s important to have the Roth IRA and the Traditional IRA accounts because part of my employer's 401k was considered Roth and the other traditional from a tax standpoint. They need to roll over into the corresponding tax account in order to avoid triggering a taxable event.
Luckily, our 401k custodian also used Charles Schwab, I assumed this would make the transfer of funds even smoother, and I was correct.
According to Investopedia, “The best way to accomplish a rollover to either a Roth IRA or another Roth 401(k) is from trustee to trustee. This ensures a seamless transaction that should not be challenged later by the IRS, who may be concerned whether the transaction was made for the full amount or in a timely manner.”
It’s vital to understand the rules and regulations for 401k and IRA distributions prior to making any transfers out of your retirement accounts. Here’s a special tax notice that answers a lot of important questions.
Step 2: Submit the rollover paperwork to HR
Upon leaving the company, I requested the rollover form from our 401k custodian. This is the company that administers the 401k plan and has the authority to wire transfer the funds from the employer-sponsored retirement account to an IRA. I contacted the custodian to ensure I was filling the form out properly and that my Roth funds would indeed roll over to my Roth IRA and my traditional 401k funds would indeed roll over into my traditional IRA account.
I had two options to perform a rollover into my IRA:
A direct rollover from 401k trustee to IRA trustee
60-day rollover where I receive a check for the funds and have 60 days to deposit into my IRA
I chose to do a direct rollover from my 401k trustee to my IRA trustee.
Note: It’s important to verify the requirements and ensure you’re understanding of what you need because, in my experience, HR will usually make a mistake (especially if you’re no longer employed with them). I also contacted my friend who’s a CFP to ensure I was following the right steps.
Step 3: Track the progress of your rollover
Ensure to get an ETA from the custodian and your HR representative. My HR representative was required to take the form I filled out, add their own information, and submit it to the 401k custodian. Don’t assume this is happening, contact your HR representative and ensure that it’s being accomplished. They should be updating you when the form has been submitted and what to expect next.
Follow up with the custodian via phone or email to ensure they received the documents and that it’s error-free. This is your retirement money and it’s well within your right to track its every move.
My HR representative informed me that I would have to wait 30 days after my last commission check for the funds to be moved. This would have delayed my transfer until the Summer and I had purposely stopped contributions ahead of time. I informed them of this and they were able to waive the 30-day requirement and process my transfers.
Step 4: Verify the rollover is accurate
Ensure you know how much should be transferring and that they are transferred into the proper accounts. Because I had Roth and Traditional 401k funds being transferred, I ensured that each account received the full balance of what it was supposed to receive.
I requested a physical statement of deposit to be mailed to me in the event that I’m questioned about the source of the funds being transferred into my IRAs. The last thing I want is to trigger a taxable event or have to mount a defense with the government.