How to Rollover a 401k Plan

i Jupiterimages/Comstock/Getty Images

All 401k plans aren’t created equal. Some providers wallop participants with huge investment fees and skimp on choices. Although you can’t escape a 401k plan while you’re employed with a firm, the second you terminate employment you’re eligible to roll over your 401k plan to an IRA. Now rollover options are more attractive because you can choose between a traditional IRA with tax deferred treatment of your dollars or a Roth IRA, which shelters your money tax-free for retirement.

Step 1

Calculate whether it’s more profitable for you to roll over your plan to a traditional or Roth IRA. There are many tools on the Internet to help you decide whether it’s better to pay the taxes now and have tax-free treatment later or defer the taxes until retirement. Generally, the math favors the Roth IRA for younger people and Traditional IRAs for people near retirement. Remember, if you change your 401k to a Roth, you'll need outside funds to cover the tax on the conversion.

Step 2

Ask your 401k provider if there are fees to roll over your 401k plan to an IRA. Although most plans have no fees to exit, some funds may have back-end charges during the initial few years you're invested. Also, annuity-based 401k plans may have surrender charges to roll over your money. Although most 401k plans have no exit fees, it’s always a good idea to ask first and find out if your 401k is the exception.

Step 3

Open an IRA. If you enjoy making investment decisions alone, focus on online or discount brokerage first to save some money on trading costs. If your eyes glaze over when the investment discussion begins or you struggle with the idea of working alone, ask friends for referrals of good financial advisers or brokers. Check her record before you hire her at the Financial Industry Regulatory Authority BrokerCheck website (see Resources.

Step 4

Call your 401k plan to find out what paperwork you’ll need to roll over your 401k to your new IRA. Sometimes the 401k company will disburse funds with a simple phone call. Others have piles of paperwork and require multiple signatures. Rather than have them send paperwork through the mail, slowing the process, ask if they can email or fax you the forms.

Step 5

File the correct forms to complete your rollover legally. You'll receive a 1099-R from your old employer, showing the rollover. Check box 7 for the letter "G." This shows the government that the money was rolled over to an eligible retirement plan. Write the rollover amount on line 12a if you file Form 1040A or line 16A if you use Form 1040. Write "0" in line 12b if you file Form 1040A or 16A if you file Form 1040 to show that you rolled over the entire amount. Write "rollover" next to this line on your tax form.

the nest