Typically, a “Rollover” is in reference to a process that occurs when an individual is either retiring, of retirement age, or otherwise departing from a current employer. Unless you already have an IRA (Individual Retirement Account) established, you would set up an IRA, and then “Roll” everything contained in your employer’s account to the IRA. The types of employer-provided plans include everything from a 401K to a Simple IRA, or a 403(b), etc. This typically is not an option for Defined Benefit/Pension plans.
Why Should I Do a Rollover?
Most individuals do not want to leave their retirement funds under the umbrella of a former employer. As Certified Financial Planner ™ practitioners or CFP’s ®, we typically recommend that you utilize the Rollover process, as it gives you full control over the funds in the account, vs. being controlled by the various aspects of your former employer’s plan. There are certain types of plans, such as a 403(b) that requires the former employer’s approval for any distributions that you decide to take from your account, even after you are retired or are no longer employed by that employer!
In other cases, if you are going to be participating in a new employer’s plan, they may allow Rollovers from a former employer to their plan. You would have to check into that option with the new employer if it is of interest to you. This might be a good option for you, if you have not yet accumulated much in a previous employer’s plan that would justify setting up a separate IRA.
How Do You “Do” a Rollover?
Once you have established an IRA to receive the funds in an employer’s plan, you will have to contact your employer’s HR department, or in some cases what is called a Plan Manager (which is whoever is in charge of managing the plan for the employer) to find out what their process is for a Rollover Request. It is important to note that every single plan is different or unique, in terms of what each requires to process a rollover:
- Some Rollover requests are completed on-line.
- Some are completed only by a telephone call.
- Some require completion of a written form- please note that you can only use their forms.
- Some will send a check to you, made out to the new custodian – the brokerage, bank, etc. that holds your new IRA account.
- Some will send a check directly to the custodian.
- Some require notarized signatures from you and/or your spouse.
- I know of one Rollover process that required a copy of a marriage license!
What is most important if you do decide to do a Rollover, is that you do a “Direct” Rollover- so that the funds are not distributed to you first, as in the check made out to you, or a direct deposit to your checking account, etc.
Why Should I Do a “Direct Rollover”?
There are a few primary reasons why you should do a Direct Rollover, vs. having the employer’s retirement account payable to you, and both are tax-related:
- Any funds distributed directly to you, become immediately taxable for the year distributed, unless you then Roll those funds into an IRA within 60 days of the distribution.
- In most cases, if retirement funds are made payable to you, the employer or plan manager will automatically withhold 20% for taxes, and you have no choice in the matter.
- Unless you also add the 20% that was withheld by the employer to the rollover amount within that 60 day time frame mentioned above, that 20% withholding will be treated as a distribution and you will pay taxes on that amount! You will also have to wait until you file your taxes the following year before you would receive any part of that withholding that is not applied to your taxes due.
Does it Cost Anything to do a Rollover?
Typically, No, as long as you meet the criteria from your employer’s plan for Rollovers. While there should be no costs to complete the actual Rollover, please note that most custodians have some fees associated with the IRA. There are usually maintenance costs, and/or trading costs if your financial advisor, etc. is managing or investing the assets for you. If you elect to set up an IRA Annuity, or other type of insurance product, there will be sales charges/commissions charged at the outset, and usually fees to maintain the account as well. You should make sure to review all of these fees as a part of your decision-making process.
What Should I Do If I am Planning to Retire or Leave My Current Employer?
At minimum, talk to the HR department, etc. to make sure you fully understand your options before your termination date. Our recommendation is to also meet with your financial advisor once you have the information from your employer, and then make your decision about how you want to proceed. If you have been working with a Certified Financial Planner ™ practitioner, you have likely already been discussing plans for retirement, along with your anticipated goals and needs, and the decision regarding your potential Rollovers have been a part of that discussion.