If you’ve learned anything from me, it’s that I like to keep things simple.
When it comes to your finances, you shouldn’t be scrambling to keep track of multiple accounts in various places. It’s hard enough to stay on top of your everyday responsibilities, so why would you add more complexity to your life? The more balls you have in the air, the higher the risk of something slipping through the cracks. Don’t let that be the fate of your retirement savings.
Here’s a simple guide for how to consolidate your old IRAs or 401(k)s from previous employers in one place so you can spend your time focusing on what really matters to you.
1. The Easy Way
Don’t you hate it when someone wastes your precious time beating around the bush? I feel the same way when it comes to rolling over IRAs. Making changes to your finances often requires paperwork, confusing jargon, and the risk of taxes or penalties if not done correctly.
Enter direct IRA transfers. As the name implies, this is an electronic transfer that directly moves your IRA or old 401(k) from one provider to another. The providers take care of all the details and you don’t have anything to do with the movement of the funds. It’s magic. You sign the applicable documents, and voila! It’s done.
Why is this the best way to handle a transfer? It’s easy, it’s convenient, it saves you money, and it keeps your money in play in the market.
And it gets better. As an added perk, this method is not considered a distribution (it’s not a taxable event) and you aren’t limited in the amount of transfers you make.
2. If Using Technology Isn’t An Option
Go old school and do a direct transfer via check. If your outgoing provider doesn’t have a platform that offers electronic transfers, or if your old 401(k) plan won’t do an electronic transfer to an IRA account, you’ll need to add an extra step. It’s not as efficient, but it gets the job done and provides you a penalty-free, tax-free option for moving your hard-earned money.
Contact your previous employer’s HR department that handles your 401(k), fill out some simple paperwork, receive a check made out to your new account, and deposit said check After that sit back and enjoy having all your money in one place so you can feel in control of your money and investments.
3. Your Last Resort
Indirect rollovers are more work for you and come with extra IRS rules and restrictions, so only go this route if options #1 and #2 won’t work for you. Here’s the process: ask your provider for an early distribution with no withholding, see the funds appear in your personal account (resist the urge to fly to Vegas), then deposit your funds into your IRA of choice within 60 days.
Want to know the cons? You are limited to one indirect rollover a year. You will need to report your rollover on Form 1040 at tax time. The money passes into your hands first, and it’s up to you to remember to deposit them in your IRA in time. Indirect rollovers can get messy, so stick with the direct route if possible.
Ready To Take Control and Streamline Your Financial Life?
If you are tired of having your accounts all over the place, let me help you consolidate your finances and simplify your life. We even have a simple online tool to help you get organized.
For many people, a 401k is their largest retirement account. It deserves your undivided attention. Download our Ultimate 401(k) Guide for a step-by-step strategy to master your 401(k), including a prioritized checklist. It’s free!
Pathway founder and principal Greg Brown is a fee only financial advisor with broad financial planning and investing expertise. Greg’s financial advice has been featured in publications like Yahoo Finance, Bankrate, Investopedia (all articles here), Wall Street Journal, and USA Today. He holds a master’s degree from the University of Chicago and a mechanical engineering degree from Michigan State University. Prior to Pathway, Greg was a lead analyst at Morningstar and previously held engineering roles at Dell (including a US Patent).
Also published on Medium.