How To Rollover A 401(a), 401(k), 403(b) and 457(b) Account Into An IRA

A step by step guide anyone can follow

Disclaimer - I do not represent or speak for TIAA or Oklahoma State University. All opinions of my blog (College of Retirement) are my own and do not reflect the opinions of TIAA or OSU.

TL/DR:

1. Open a new IRA

2. Call plan administrator and request paperwork

3. Complete the paperwork and submit it to the plan administrator

4. Check the new IRA for the deposit

Recently I’ve helped a few folks move old retirement plans from their employers retirement plans into an Individual Retirement Account (IRAs).

The IRS has a great little chart summarizing rollover options. IRS Rollover Chart.

We have 4 options with our old 401(k)s:

1. Keep it at the old employer

2. Cash it out

3. Merge the 401(k) account with our new employer’s 401(k) plan.

4. Rollover the account into an IRA.

Options 1 and 2 have significant drawbacks and options 3 and 4 have significant advantages.

What’s up with all the numbers and letters?

401(k) refers to a section in the Internal Revenue Code (IRC) which provides guidance for retirement plans. Each number, 403(b), 457(b), etc, is another section in the IRC describing a different plan.

Why rollover your retirement account?

Here are a few advantages of Rollovers:

1. More Investment Choices

2. Better Services

3. Lower Fees and Costs

4. More flexibility - Ex Roth Conversions

5. Cash and Other Incentives

6. Fewer and Clearer Rules

7. Estate Planning Advantages

You may notice that a Rollover IRA is different than an IRA. Option 3 from above is the biggest reason for the difference. The IRS allows you to take a former 401(k), which was moved into a Rollover IRA, and merge it into a new employer-sponsored 401(k) plan. Traditional IRAs can’t do this.

Why would anyone want to roll an old 401k into the new 401k?

The main reasons are:

• Maintain a simple and manageable portfolio of accounts. Less is more.

• Keep your “IRA bucket” free for back-door Roth IRA contributions.

Option 4, Rollover IRA, is the topic of content today.

I have several clients who started working with me who had over 14 different qualified accounts (401k, 403b, 457b, IRA, Roth IRA, etc) and we were able to consolidate their accounts down to 3; Their current 401k, an IRA and a Roth IRA. This was a massive reduction in paperwork, statements, logins, and stress. It was also big improvement in efficiency, investment strategy and peace of mind.

Depending on your plan, 401(a)s, 403(b)s and 457(b)s can also merge with your new employer plans.

Steps to Rollover your 401(a), 401(k), 403(b) or 457(b) into an IRA:

1. Open up a new IRA. Once the new account is open you should contact the new company and request a Letter of Acceptance (LOA). The LOA should be sent to the plan administrator along with your distribution forms.

2. Call the plan administrator. You will need to ask about the transfer process, request the appropriate paperwork and verify that your previous employer notified the plan administrator of your termination date.

You can not rollover a retirement account (401(a), 401(k), 403(b) and 457(b)) if you are still employed at the plan sponsor.

3. Complete the paperwork and return to the plan administrator.

There are two types of rollovers: a Direct IRA Rollover and an Indirect IRA Rollover

A Direct IRA Rollover is when the assets transfer from your old plan straight into your new IRA. The 2 financial institutions work together to ensure the transfer is completed.

For any employer-sponsored plan (401(a), 401(k), 403(b) and 457(b)) you need to call up the plan administrator and request the proper distribution forms. Once filled out and signed, you will submit the forms to the plan administrator who will then process the transfer. Because the money is moving from one qualified account to another, the IRS categorizes this transfer as a non-taxable distribution and you won’t be taxed.

Assuming all is well, you can expect the money to transfer within 5-7 business days.

Direct IRA Rollovers are my preferred method of transfer because they are faster, more secure and require less work.

Indirect IRA Rollovers transfer via paper check. For big rollovers this could mean you receive a $1,000,000 check in the mail… Scary I know.

Similar to a direct IRA rollover, you will contact the plan administrator, fill out and sign the distribution forms requesting a check, and then wait. When the check arrives, you have 60 days to deposit the check into your new IRA. If you fail to do so, the distribution will be marked a taxable and you will have a big tax surprise and potentially a tax penalty waiting for you in April.

Additionally, the IRS requires your previous employer to withhold 20% of your funds if you request a check. You could get some of all of this once you file your taxes but if you rollover at the beginning of the year you might have to wait +12 months to get your money back.

In my opinion, indirect IRA rollovers are inefficient, slow, and a bad idea.

In some situations, a medallion signature guarantee is required. This is essentially a more secure version of a notary. Most banks provide this service.

4. Monitor your new IRA for 5 business days. If the money hasn’t arrived by the 5th day, I recommend calling the plan administrator and your new IRA company to see what’s going on. Most of these big companies aren’t quick to call you and tell you the paperwork isn’t correct. I always call the day after submitting the paperwork to ensure everything is in order.

That’s basically it. Pretty simple right?

Remember, the goal is to KISS. Keep It Super Simple.

If managing your finances is like herding cats, then the only way to make it easier is to herd less cats. Consolidating your investment accounts with rollovers will make managing your investments much easier.

Thanks,

CM

Additional Resources:

Vanguard has a nice guide for completing a rollover that can also help.