How to roll over an old 401(k)

Old 401(k)s are a little like the old clothes in the back of your closet. You know you should do something about them, but there they sit, mostly out of sight and mind.

And so it is with your old 401(k). If deciding what to do with an old (k) plan has been on your to-do list for a while, here are the key steps you should take to get it done.

Step 1: Check your account value.

If your balance in your former employer’s 401(k) plan is over $7,000, you can leave the money behind in the old plan or roll the assets into an IRA or your new employer’s 401(k).

But if your balance falls below that $7,000 threshold, some of the decision-making may be out of your hands.

Step 2: Determine whether to stay within the 401(k) confines.

Assuming your balance is over $7,000, your next task is to decide whether to roll the money into an IRA or keep it inside a 401(k).

I often recommend rolling over the assets from a former 401(k) into a no-fee IRA with a topnotch mutual fund company or discount broker. But some people value the extra creditor protections that can accompany 401(k) assets versus IRA assets, while others may prize 401(k)-specific investment options.

Step 3: Assess the quality of your 401(k) options.

If you think you will be better off leaving your money inside a 401(k) rather than rolling it over to an IRA, the next job is to conduct some research on your own 401(k) options.

Even if you do decide to stay with a 401(k), you may need to decide whether you’re better off staying put in your former employer’s plan or that of your new employer.

Step 4: Find the right IRA provider.

If a rollover to an IRA is the way to go, the next step is to identify the right brokerage firm or mutual fund company. Look for a firm that offers a breadth of high-quality investment options with no additional layers of fees for IRA investors. Target-date funds are an elegant, low-maintenance, and underutilized option.

Step 5: Decide whether to convert your traditional 401(k) assets to Roth.

If you decide to roll Roth 401(k) contributions to an IRA or your current employer’s 401(k), your new account will be Roth, too, meaning that you won’t owe tax on qualified withdrawals.

If you have traditional 401(k) assets, a rollover is also a good time to consider whether to convert those assets to a Roth account at the same time.

Step 6: Execute.

If you’ve decided to roll over your assets to an IRA, fill out the paperwork or online form to open the IRA. You’ll then request a direct rollover from your 401(k) plan to the new IRA provider.

The process may be a bit more cumbersome if you’re rolling over to your current employer’s 401(k).

In both cases, make sure your 401(k) provider makes the check payable to the provider and sends it directly to them, rather than to you. If the check is made out to you, 20% of the balance will be withheld for income tax. You’ll then have 60 days to get that money deposited into an IRA or another 401(k); if that deadline comes and goes, the distribution will count as a withdrawal and you’ll owe ordinary income tax and a 10% early withdrawal penalty if you’re not 55 or older.

Step 7: Determine what to invest in.

If you’ve decided to roll over your assets from an old 401(k) to another 401(k) or IRA, you’ll also have to determine how you’ll allocate those assets.

If all of your retirement assets were in your old 401(k), a sturdy target-date fund is a one-stop, low-maintenance choice that you can hold into retirement. If your old 401(k) is just one of several accounts geared toward retirement, a rollover can be an ideal time to check up on how all the pieces fit together—and where you have holes.

__