When you change jobs you have a choice to make regarding your retirement plan at former employer. If the plan is a 401(k), 403(b), or other qualified plan of that nature, you may have the option to roll the old plan into a plan at your new employer.
The new employer’s plan must allow rollovers into the plan – this isn’t always automatic. Most plans will allow rollover of former employer’s plans, but not all. Once you’ve determined that the plan will accept a rollover, you should review the new plan to understand whether or not it makes sense to roll your old plan into it, or choose another option. Other options may be: rollover the old plan into an IRA, convert the old plan to a Roth IRA, leave the old plan where it is, or take a distribution from the old plan in cash.
In this article we’ll just deal with rolling over the old plan to your new plan.
If the new plan has some compelling features, such as access to very low cost institutional investments or attractive closed investment options, or if the plan has very low overhead and great flexibility, you might want to rollover your old plan into it. Other reasons that might compel you to rollover the old plan might be – to have access to loan features (IRAs don’t have this), access to your funds when leaving your employer after age 55 but before age 59½, and ERISA protection against creditors.
There may be reasons to leave your old plan at the old employer though. The two that come to mind are NUA treatment of stock of the old employer, and if you think you’ll need access to the funds before you leave the new employer (especially if you’ve left that employer after age 55).
So after reviewing the options and features, you’ve decided to rollover the old plan to the new employer’s plan. It’s a relatively straightforward process: you contact the old plan’s administrator and request a rollover distribution form. You should have already contacted the new plan’s administrator to ensure that the new plan will accept a rollover. Once you have the rollover distribution form from the old employer, get any pertinent information from the new employer, such as your employee id, or an account number for the new plan.
On the rollover distribution form, you’ll have the option to send the distribution directly to the new plan – called a trustee-to-trustee transfer. In this manner, the funds never come into your possession. This is important, because if you take distribution in cash from the old plan, the IRS requires that 20% is automatically withheld from the distribution. You could still send the distribution to the new plan – but you’d have to come up with the 20% that was withheld in order to make the transfer “whole”. It’s not required that you make a complete transfer, but if you take any of the funds in cash, including the withheld 20%, this money will be taxable as ordinary income, and if you’re under age 59½ it will likely also be subject to an additional 10% penalty.
After all of this has occurred, your new plan will have the additional old plan money rolled into the account. Most likely this will be entirely in cash when it arrives in the account – so you will need to make investment allocation choices for the new addition to the account.