A direct rollover is a tax-free distribution. In this process, funds are moved from a qualified account (like your 401k) to your IRA. Funds aren’t moved electronically, however. Your 401k custodian will send a check payable to your new IRA custodian.
Because the check is made payable to your IRA custodian, you are unable to cash the check yourself or deposit it to your bank account. If the check is made payable to yourself, you might have inadvertently processed a taxable distribution.
To begin the rollover process, follow these steps:
- Call your 401k custodian and let them know you have left your employer and would like to process a rollover to another retirement account.
- Give them the name of your IRA custodian.
- Give them your account number and IRA custodian’s address, if requested.
If they mail the check to you instead, that’s okay. Just be sure to send it to your IRA custodian in a timely manner.
When should you do a rollover of your 401k?
Here are a few scenarios when you should consider a rollover:
- Consolidation: It can be annoying to have multiple retirement accounts at different providers. Simple tasks like updating your address means calling multiple providers (or HR departments at your old employer).
- Different investment options: If you would rather have investment options not offered by your 401k, an IRA rollover allows you this opportunity. An aggressive investor might want to overweight stocks with higher expected returns like small cap value and emerging market stocks. Conservative investors might want options other than bond mutual funds to protect their investments. Or, Christian investors might want to align their investments with their values.
- Roth conversion: This may be a good opportunity for you to convert your pre-tax retirement dollars to a tax-free Roth IRA. Roth conversions can benefit most people, and it might be wise to do this when income takes a hit, as the tax is dependent on your income.
Deciding what to do with your retirement account is dependent on your personal situation. Talk to one of our advisors to discuss your next steps.