Transferring Retirement Funds from Previous Employers

Quick answer

• Understand your options: rollover to an IRA, roll over to your current employer’s plan, or leave it with the old plan.
• Gather statements from your old retirement accounts.
• Decide if you want a direct rollover (funds sent to the new account) or indirect (funds sent to you, then deposited).
• Choose a new account if rolling into an IRA or a new employer’s plan.
• Complete the rollover paperwork with both the old and new account providers.
• Monitor your accounts to ensure the transfer is complete and accurate.

What to check first (before you invest)

Time Horizon

Your time horizon is the length of time you have until you need to access the money. For retirement funds, this is typically many years, often decades. A longer time horizon generally allows for more aggressive investment strategies, as you have more time to recover from market downturns. Consider when you plan to retire and how long you expect your retirement to last.

Risk Tolerance

Risk tolerance is your emotional and financial capacity to handle potential losses in your investments. It’s about how comfortable you are with the ups and downs of the market. If market drops cause you significant anxiety or if you might need the money sooner than expected, you may have a lower risk tolerance. Understanding this helps you choose investments that align with your comfort level.

Emergency Fund

Before moving retirement funds, ensure you have a robust emergency fund. This is a separate savings account holding 3-6 months of living expenses, readily accessible for unexpected costs like job loss, medical bills, or major home repairs. Relying on retirement funds for emergencies can incur penalties and taxes, and it depletes your long-term savings.

Fees and Tax Impact

Different retirement accounts have different fee structures and tax implications. When considering a rollover, compare the fees associated with the old plan, your current employer’s plan, and potential IRA providers. Understand how taxes will be handled during the transfer. Generally, a direct rollover to another tax-advantaged account avoids immediate taxes and penalties.

Account Type

You have several options for where to move your retirement funds. You can roll them into your current employer’s retirement plan (if allowed), open an Individual Retirement Account (IRA), or, in some cases, leave the money in your former employer’s plan. Each option has its own set of rules, investment choices, and potential fees. Researching these is crucial before making a decision.

Step-by-step (simple workflow)

1. Locate Your Old Retirement Account Statements

• What to do: Find the most recent statements for all retirement accounts from previous employers. These statements will contain vital information like account numbers, the plan administrator’s contact details, and the current balance.
• What “good” looks like: You have clear, up-to-date statements readily available.
• Common mistake: Not being able to find old statements, leading to delays.
• How to avoid it: Set up a system for organizing important financial documents, either digitally or in a physical file, as soon as you leave a job.

2. Identify Your Retirement Account Type

• What to do: Determine if your old accounts are 401(k)s, 403(b)s, SIMPLE IRAs, SEP IRAs, or other types. This information is usually on your statements.
• What “good” looks like: You know the exact type of each retirement account.
• Common mistake: Confusing different types of retirement accounts, which can lead to incorrect rollover procedures.
• How to avoid it: If unsure, contact the plan administrator listed on your statement for clarification.

3. Review Your Options for the Funds

• What to do: Consider rolling over to your current employer’s plan, opening a new IRA, or leaving the money in the old plan (if permitted and advantageous).
• What “good” looks like: You’ve weighed the pros and cons of each option based on fees, investment choices, and your personal situation.
• Common mistake: Not exploring all available options, potentially missing out on better investment opportunities or lower fees.
• How to avoid it: Research the features of your current employer’s plan and compare them with offerings from various IRA providers.

4. Choose Where to Roll Over Your Funds

• What to do: Based on your review, decide whether to roll into your current 401(k), a Traditional IRA, a Roth IRA (if converting), or another eligible account.
• What “good” looks like: You’ve made a clear decision about the destination account.
• Common mistake: Procrastinating the decision, leaving funds in limbo.
• How to avoid it: Set a deadline for making this decision and stick to it.

5. Contact Your New Account Provider (if applicable)

• What to do: If rolling into an IRA or a new employer’s plan, contact the institution where you will open the new account. They will guide you through their process and provide necessary forms.
• What “good” looks like: You have the required paperwork and instructions from the receiving institution.
• Common mistake: Starting the process with the old provider before understanding the new provider’s requirements.
• How to avoid it: Always initiate the process with the institution that will receive the funds.

6. Contact Your Old Plan Administrator

• What to do: Inform your former employer’s plan administrator that you wish to initiate a rollover. They will provide specific forms and instructions for their plan.
• What “good” looks like: You have the necessary forms from the old plan administrator to initiate the transfer.
• Common mistake: Assuming the process is the same for all plans.
• How to avoid it: Follow the exact instructions provided by each former plan administrator.

7. Decide on Direct vs. Indirect Rollover

• What to do: A direct rollover involves the old plan sending funds directly to the new account. An indirect rollover involves you receiving a check, which you then deposit into the new account within 60 days. Direct rollovers are generally preferred to avoid tax complications.
• What “good” looks like: You understand the difference and have chosen the method that best suits your situation, ideally a direct rollover.
• Common mistake: Opting for an indirect rollover without understanding the 60-day deadline and potential tax withholding.
• How to avoid it: Always ask for a direct rollover unless there’s a compelling reason not to. If you receive a check, deposit it immediately.

8. Complete and Submit Rollover Forms

• What to do: Fill out the required paperwork accurately for both the old and new account providers. This often includes account numbers, personal information, and the amount to be rolled over.
• What “good” looks like: All forms are completed correctly and submitted promptly.
• Common mistake: Incomplete or inaccurate forms causing significant delays or rejections.
• How to avoid it: Double-check all information before submitting. Keep copies of all submitted forms.

9. Monitor the Transfer Process

• What to do: Keep track of the transfer status by contacting both the old and new account administrators periodically.
• What “good” looks like: You receive confirmation that the funds have been successfully moved from the old account to the new one.
• Common mistake: Assuming the transfer is complete without confirmation, potentially missing issues.
• How to avoid it: Set reminders to check the status and follow up if you don’t see activity within the expected timeframe.

10. Review and Adjust Investments in the New Account

• What to do: Once the funds have arrived, review the investment options available in your new account and make choices that align with your time horizon and risk tolerance.
• What “good” looks like: Your retirement funds are invested according to your financial plan.
• Common mistake: Leaving the money in a default or low-performing investment option.
• How to avoid it: Take the time to select investments that match your goals and risk profile.

Risk and Diversification (plain language)

• What is risk? Risk in investing means the possibility that your investment’s value could go down. For example, if you invest $1,000 in a stock, its value could fall to $800, meaning you’ve lost $200.
• Diversification is your friend. Imagine putting all your eggs in one basket. If you drop it, all your eggs break. Diversification is like putting your eggs in many different baskets. If one basket falls, you still have others.
• Spreading your money. This means not putting all your retirement savings into just one type of investment, like a single stock or a single bond.
• Different asset classes. Your “baskets” can include stocks (ownership in companies), bonds (loans to governments or corporations), and potentially other assets like real estate or commodities.
• Example: Stocks. Investing in a single tech company stock is riskier than investing in a mutual fund that holds stocks from many different tech companies, or even a fund that holds stocks from companies across various industries (tech, healthcare, energy, etc.).
• Example: Bonds. Bonds are generally considered less risky than stocks, but they still carry risk. A government bond is usually safer than a corporate bond from a struggling company.
• Why it matters. Diversification helps reduce the impact of any single investment performing poorly on your overall portfolio. It aims to smooth out the ride.
• Don’t put all your retirement savings into one company’s stock, even if it’s a company you like. A diversified approach spreads your risk across many companies and industries.

During market drops, it’s natural to feel concerned. However, remember that market downturns are a normal part of investing. If your portfolio is diversified, it’s designed to weather these storms. Avoid making impulsive decisions to sell everything out of panic. Instead, review your long-term goals and consider if any adjustments to your investment strategy are needed, rather than reacting to short-term volatility.

Common mistakes (and what happens if you ignore them)

Mistake	What it causes	Fix
Leaving funds in an old employer’s plan indefinitely without monitoring.	Potentially higher fees, limited investment options, and difficulty tracking assets if you have many old accounts.	Consolidate funds into one IRA or your current employer’s plan for easier management and potentially lower costs.
Not understanding the 60-day rule for indirect rollovers.	If you receive a check and don’t deposit it within 60 days, it’s considered an early withdrawal, subject to income tax and a 10% penalty if you’re under age 59 ½.	Always opt for a direct rollover. If you receive a check, deposit it immediately and confirm receipt.
Cashing out retirement funds instead of rolling them over.	Immediate income tax liability on the entire amount, plus a 10% penalty for early withdrawal if under age 59 ½. This significantly depletes your retirement savings.	Roll over the funds into an IRA or your current employer’s plan to maintain their tax-advantaged status.
Not comparing fees between old and new accounts.	Paying higher fees can erode your investment returns over time, meaning less money for retirement.	Actively compare expense ratios of mutual funds and administrative fees of the accounts.
Choosing the wrong type of IRA for a rollover.	If you roll over pre-tax funds into a Roth IRA without properly accounting for taxes, you’ll owe taxes on the entire amount.	Understand the tax implications of Traditional vs. Roth IRAs and consult a tax professional if unsure.
Failing to update investment allocations in the new account.	Your money might be invested too conservatively or too aggressively for your current needs and risk tolerance.	After rolling over, review and select investments that align with your long-term goals.
Not completing paperwork accurately or fully.	Delays in the rollover process, potential rejection of the transfer, or funds being sent to the wrong account.	Double-check all information on forms, ensure all required signatures are present, and keep copies.
Forgetting about old, small retirement accounts.	These small accounts can accumulate significant fees over time and are hard to track, potentially leading to lost money.	Consolidate all old accounts into one manageable IRA or current employer plan.
Not considering the investment options available in the new plan.	You might end up with limited choices that don’t align with your investment strategy.	Research the investment menu of your current employer’s plan or potential IRA providers before deciding where to roll over.

Decision rules (simple if/then)

• If your old employer’s plan has high fees and poor investment options, then roll over the funds to an IRA or your current employer’s plan because you can likely find better choices and lower costs.
• If your current employer’s plan has a good selection of low-cost investments and accepts rollovers, then rolling into that plan can simplify your retirement accounts.
• If you want more investment control and a wider range of options, then rolling over to an IRA is often a good choice because IRAs typically offer more flexibility.
• If you are considering a Roth IRA and have a lower tax bracket now than you expect in retirement, then consider a Roth conversion because you’ll pay taxes now at a lower rate.
• If you have multiple old retirement accounts, then consolidating them into one IRA or your current employer’s plan is beneficial because it simplifies management and reduces the chance of losing track of assets.
• If you are close to retirement and have a low risk tolerance, then consider moving your funds into more conservative investments after the rollover because preserving capital becomes more important.
• If you have a long time horizon until retirement and a higher risk tolerance, then you can consider more growth-oriented investments after the rollover because you have time to recover from market fluctuations.
• If you are unsure about the tax implications of a rollover or conversion, then consult a tax professional because incorrect decisions can lead to significant tax liabilities.
• If your old employer’s plan has excellent investment options and very low fees, then leaving the money there might be an acceptable option, but still monitor it periodically.
• If you receive a check for your rollover, then deposit it into your new retirement account within 60 days because failing to do so will result in taxes and penalties.

FAQ

Q: Do I have to roll over my old retirement funds?

A: No, you are not required to roll over your funds. However, it’s generally advisable to consolidate them for easier management and potentially better investment options and lower fees.

Q: What is a direct rollover?

A: A direct rollover is when your old retirement plan administrator sends the funds directly to your new retirement account provider. This is the preferred method as it avoids potential tax issues.

Q: What happens if I don’t roll over my funds and leave them with my old employer?

A: You can often leave the funds in your old plan, but you might face higher fees, limited investment choices, and it can be difficult to track if you have many old accounts. Check the plan’s rules for minimum balances required to keep the account open.

Q: Can I roll over a Roth 401(k) to a Roth IRA?

A: Yes, you can generally roll over a Roth 401(k) into a Roth IRA. The funds maintain their Roth (after-tax) status.

Q: What if my old employer is no longer in business?

A: If the company is out of business, you may need to contact the plan’s custodian or trustee. The IRS has rules for handling such situations.

Q: How long does a rollover typically take?

A: The process can vary, but it often takes anywhere from a few days to a few weeks for the funds to be fully transferred and reflected in your new account.

Q: Can I combine funds from different old employers into one IRA?

A: Yes, you can typically roll over funds from multiple former employers into a single IRA. This is a common strategy for consolidating retirement assets.

Q: Will I pay taxes if I do a direct rollover?

A: No, a direct rollover to another qualified retirement account (like another 401(k) or an IRA) is not a taxable event.

Q: What if I have a pension instead of a 401(k)?

A: Pensions are different from 401(k)s. You typically receive pension payments directly from the plan administrator in retirement. Rollover rules generally apply to defined contribution plans like 401(k)s and IRAs.

What this page does NOT cover (and where to go next)

• Specific investment product recommendations.
• Detailed tax advice for complex situations.
• Estate planning considerations for retirement accounts.
• Strategies for managing retirement income during retirement.
• International retirement savings plans.