An old 401(k) from a former job: what a rollover involves and how long it takes

What actually happens, in two sentences

In a rollover, you ask your former employer's plan to send your balance either directly to a new employer's plan or to an IRA in your name, and the receiving account invests it according to your instructions. Done as a direct rollover, where the money moves straight from one account to the other, it is not taxed, and how long it takes depends mostly on how quickly the old plan processes the paperwork. The traps are in the other kind of rollover, where a check comes to you, and in cashing out instead of rolling over.

I help families with this regularly, often because an old account has been sitting untouched since a job change years ago. Before anything moves, though, the first question is whether it should move at all.

You have four choices, not one

FINRA lists the options when you leave a job: leave the money in your former employer's plan, roll it into your new employer's plan if that plan accepts transfers, roll it into a new or existing IRA, or take the cash. Each has a place, and the right answer depends on your circumstances.

Leaving it where it is can make sense if the old plan has low costs and good investment choices and allows you to stay. Moving it to a new employer's plan keeps everything in one workplace account. Rolling it to an IRA usually gives you a wider range of investments and puts the account fully under your control, though the costs depend on what you choose inside it. Cashing out is the option I discourage most, for reasons I explain below.

Whatever you choose, make it a decision rather than a default. An account left behind by accident tends to drift: the address on file goes out of date, the statements stop arriving and the investments chosen at twenty-five are still there at forty-five. An account left behind on purpose, and reviewed once a year, can be perfectly fine.

• Leave it in the former employer's plan, if the plan allows
• Move it to your new employer's plan, if that plan accepts rollovers
• Roll it into an IRA in your name
• Take a cash distribution, with the taxes and penalties that can follow

Why cashing out is usually the expensive choice

When a job ends, a check can look like a cushion. FINRA warns that cashing out is costly and can involve significant taxes and early withdrawal penalties, and that before age 59½ the early withdrawal penalty is generally 10 percent of the amount withdrawn, subject to exceptions. The IRS adds that if you do not roll over a payment, it will be taxable, and you may owe the additional tax unless you qualify for an exception.

Beyond the immediate bill, cashing out resets years of saving to zero. In my experience, the families who cash out an old 401(k) during a job change rarely rebuild that balance on the same timeline. If you need cash during a transition, that is a reason to build an emergency fund first next time, not a reason to empty a retirement account. The order I recommend, with the emergency fund near the top, is laid out in putting protection and savings in order.

First, find every account you have left behind

Many people I meet in Dallas have worked for three or four employers and are not sure how many old plans they still have. Before deciding what to do, make a list. Look through old W-2s and benefit packets, search your email for statements, and call the human resources department of former employers to ask who administers the plan. Write down each balance, the investments and any fees shown on the statement.

Once everything is on one page, the decision usually becomes clearer. Several small accounts scattered across old employers are harder to manage, rebalance and keep beneficiaries current on than one or two consolidated ones. Consolidation is not always right, but it is worth considering when the list gets long.

Direct rollover or 60-day rollover

How the money moves matters as much as where it goes. The IRS describes a direct rollover as one where the plan administrator pays the money straight to another plan or IRA, and in that case no taxes are withheld from the transfer. That is the method I recommend in almost every case.

The alternative is a 60-day rollover. The plan pays you, and you have 60 days from the date you receive the distribution to deposit it into an IRA or another plan. Here is the trap: the IRS explains that a plan payment sent to you is subject to mandatory 20 percent withholding, even if you intend to roll it over. To roll over the full amount, you have to make up the withheld 20 percent from other money. If you cannot, the shortfall is treated as a distribution and may be taxed and penalized.

• Direct rollover: money moves plan to plan or plan to IRA, with no withholding
• 60-day rollover: you receive the check, 20 percent is withheld, and you have 60 days to deposit the full amount
• Missed deadline: the amount not rolled over can become taxable, with a possible additional tax

The steps, from first call to invested money

A typical direct rollover follows the same path whichever company holds the old account. Knowing the steps helps you see where delays come from and what you can do to avoid them.

• Find the most recent statement and the plan administrator's contact details
• Decide where the money is going and open the receiving IRA or confirm the new plan accepts rollovers
• Request a direct rollover from the old plan, using its forms and the receiving account's details
• Provide any signatures, spousal consents or verifications the old plan requires
• Watch for the money to arrive, then confirm it has been invested and not left in cash
• Keep the paperwork for your tax records

So how long does it take?

There is no single answer, because the timeline is set mostly by the old plan's process. Some plans handle a direct rollover request quickly; others require paper forms, notarized signatures or a waiting period before they release funds. The receiving side usually moves faster once the money arrives. In practice, the biggest delays I see come from missing information: a form without a signature, an account number typed wrong, or a plan that needs a spouse's consent that nobody mentioned.

You can shorten the process by gathering everything before you start, asking the old plan exactly which forms and signatures it needs, and following up if you have not heard back. If the plan sends a check made payable to the new account rather than to you, it still counts as a direct rollover; just forward it promptly. Do not let a check sit in a drawer.

Details that cause trouble later

A few rules are easy to miss. FINRA notes that if you leave a job with an outstanding 401(k) loan, you typically have 90 days to repay the balance, and an unpaid balance is treated as a taxable withdrawal. If your old account holds both Roth and pre-tax money, keep each type going to the matching kind of account unless you are deliberately converting, because moving pre-tax money into a Roth account is a taxable event. That is a question for your tax professional before you sign.

If you already have IRAs, the IRS explains that you generally cannot make more than one rollover from the same IRA within a one-year period, and that limit applies across all your IRAs combined, while direct trustee-to-trustee transfers are not limited. One more reason to favor direct transfers whenever you can.

Questions to ask anyone recommending a rollover

A rollover recommendation deserves scrutiny, from me or anyone else. FINRA notes that employer plans carry asset-based fees and may have other expenses, and an IRA has its own costs depending on what you invest in. Ask for a clear comparison: what you pay now, what you would pay after the move, what investment choices you gain or lose, and what services come with each option.

Also ask how the person recommending it is paid, and check their background on BrokerCheck. The full list of questions I would ask is in what to ask a financial advisor before hiring. A good recommendation should still make sense to you after you have heard the costs.

After the money lands

Once the rollover is complete, three things deserve attention. First, confirm the money has been invested according to your plan, not parked in cash. Second, name or update the beneficiaries on the new account; this is easy to overlook and important, as I explain in reviewing your coverage and beneficiaries after a life change. Third, decide whether you will keep adding to the account. If you are eligible, the differences between traditional and Roth contributions are covered in opening a Roth IRA on your own.

I help families around Dallas decide whether an old account should move, set up the receiving IRA, request the direct rollover and invest the money with established asset managers once it arrives. I am a registered representative of PFS Investments Inc., and products are offered only in states where I am licensed. Investments carry risk and no return is promised. Bring your most recent statement to a first meeting, and we will look at it together with no obligation.

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