How do I roll over a retirement account?

Four years: That’s the average job tenure of both wage and salary workers in the United States. Based on those statistics, it’s realistic to assume you’ll have more than one job during your career. If a position you leave comes with a retirement account, you may want to or need to do something with those savings.

One option is to complete a rollover of your retirement funds into another account. Use these insights to figure out the rollover that makes the most sense for your financial plans.

A rollover is simply when you move retirement savings from one account into another. You might choose to roll over retirement funds for a number of reasons including:

• You leave a job.
• You retire and don’t want to leave your money in the employer’s retirement plan.
• You have multiple retirement savings accounts and want to consolidate them.

Many people choose to roll over retirement savings into a traditional individual retirement account (IRA). You may also be able to roll over funds into a Roth IRA or a 401(k) provided by your new employer. Each of the three has implications for your financial plans.

If you decide to use an IRA for your rollover, you can either set up a new IRA (if you don’t have one) or use an existing IRA. Here are some considerations for this type of rollover:

• An IRA travels with you. That means no matter how often you change jobs, you can use the same account.
• You won’t have to pay taxes on the IRA rollover until you make withdrawals in retirement.
• You may have more investment options with an IRA. Check with your financial professional for specifics.
• You can make additional contributions to an IRA, in addition to the rollover totals. And rollovers don’t count against your IRA tax-deductible contribution limits. (IRAs do have regular tax deduction income limits; check with your tax advisor for details.)
• You cannot take loans from an IRA. Unlike some 401(k) plans,you are unable to borrow from your retirement plan.
• Rolled over traditional IRAs are protected during a bankruptcy.

If you choose to roll over your savings into a Roth IRA, the process is similar to a traditional IRA rollover, but there are a few additional factors to keep in mind.

• You may have more investment options with a Roth IRA compared to a traditional IRA.
• There may be tax implications. A Roth IRA is funded with post-tax dollars; you’ve already paid the required income tax. So, if you’re moving rollover funds from a pre-tax account (401(k), IRA) to a post-tax account (Roth IRA) you have to pay the required income taxes at your normal rate in that tax year. When might this make sense? If you’re very early in your career and think you might be at a higher income bracket in later years, paying taxes now might fit into your plans. On the flip side, Roth IRA contributions have income limitations, but rollover contributions to a Roth IRA do not.
• You are also exempt from tax implications if the rollover is from one Roth IRA (such as a Roth 401(k)) to another Roth IRA. The only funds taxable in this situation are matching contributions from an employer.
• A Roth IRA may have tax advantages for smaller rollover amounts. Many retirement plans have a cash-out limit, meaning if you leave a job and your 401(k) is below a certain amount (typically $7,000), your former employer will send you the total, minus a 20% withholding and a 10% IRS early distribution penalty. In this case, you’ve already paid taxes, so putting the rollover funds in a Roth IRA helps preserve some of your established retirement savings.
• You cannot take a loan against a Roth IRA. Just like with a traditional IRA, you can’t borrow from these types of accounts.
• Rolled over funds in a Roth IRA are protected during bankruptcy.

Both a financial professional and a tax advisor can help you decide if a rollover into a Roth IRA is right for you.

Yes—if allowed by the new plan at your new employer. Because both the existing accounts are tax-deferred, you won’t pay any income taxes until withdrawal. But if you leave that job, you’ll have to decide what to do with the 401(k) funds again.

Consult with your financial professional. If you are already taking the required minimum distributions (RMD) from your 401(k), you may want to think about the timing of taking the RMD before completing the rollover.

When you complete a rollover, you have two options: direct or indirect.

• Direct simply means the current plan administrator sends the funds directly to the account for the rollover.
• With an indirect rollover, the funds are sent to you to complete the rollover, which you must do within 60 days. Risk is inherent in an indirect rollover: 20% withholding is automatically deducted from the total, an amount you only get back if you complete the rollover within that time period. If you don’t, it’s considered a distribution, and you’ll incur both taxes and the IRS distribution penalty of 10%.

Yes, you’ll receive both a 1099R and 5498.

If you don’t have an account such as an IRA set up, you must complete that first. Then, contact your current plan administrator and ask to roll over the funds.

• Work through financial planning and tax implications of your choices with your tax advisor and financial professional.
• Consider completing your rollover as soon as you leave or change jobs so you don’t forget about the funds.
• The time it takes to complete a rollover varies; rollovers typically take 2-4 weeks to complete. Some rollovers may be completed sooner. Those involving paper checks or additional verification may take longer. Contact your plan's provider to better understand time frames.
• This list lets you compare more about your retirement savings options (PDF).