What You Must Know Before Doing a 401k Rollover

What You Must Know Before Doing a 401k Rollover

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If you're on the verge of doing a rollover of a 401(k) retirement account, be sure to gather all the pertinent facts first. That's because there are some very specific steps for rolling over a 401k. That's just the first part of the puzzle. What's the second?

Part two is about deciding where you will be parking the assets from the old account. It's important to know that the vast majority of people who roll over a 401 are doing so because they're changing jobs, quitting a job, or getting ready to retire. A few are not retiring or leaving their current employer; they just decide to move some or all of the funds from the 401 into an IRA.

Note: No matter the reason a person rolls over their 401(k) into an IRA, the law requires them to follow certain steps. Failing to abide by the rules can mean major financial penalties and expenses.

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So, what must you know before doing your rollover? Number one: learn the steps for transferring assets from one account to another. Number two: know where the safest and best place is to put the rolled-over money. In general, the options are to move the 401 funds out of the existing account and into either a standard IRA or a self-directed IRA *(SDIRA).

*SDIRAs are also known as "gold IRAs" and "precious metals IRAs" because they allow the account holder to place tangible metals into them. While it's legal to put silver, platinum, palladium, and gold into an SDIRA, most media sources in the financial industry have nick-named them "gold IRAs." Likewise, 401(k) retirement accounts, which are sponsored by employers, are usually just called "401" accounts for short. Don't be confused by the terminology.

What You Must Know Before Doing a 401k Rollover

Here Are the Most Relevant Facts About Doing a 401(K) Rollover

  • The steps for ending a 401k and establishing an IRA
  • Deciding which kind of IRA, standard or "gold," to open
  • The steps for moving funds from a 401k to a gold IRA

1. Steps For Closing a 401k

The first thing to do: Whether you're quitting a job, have been laid off, or just want to transfer some or all of your 401k funds to an IRA, contact the administrator of the 401k and ask a few questions. What should you ask?

"Does my 401 allow me to pull funds out and put them into an IRA even if I remain employed with the company?" In most cases, employer-sponsored 401k's will allow you to do a partial pullout of the money and send it wherever you wish.

Also ask, "Does the 401 structure allow a direct transfer to an IRA, an indirect transfer, or both?" Chances are, you can have some or all of the funds in your 401 sent directly to your new IRA. This is by far the simplest and least complex way to do a rollover from a 401 to an IRA, no matter what kind of IRA you decide to set up.

Finally, ask the administrator, "Please email or send me the paperwork that I need to sign to get the process started." Once you've signed and filled out everything and designated the destination of the funds, you're all through with phase one of the process.

In most cases, you will need to already have an IRA set up and ready to receive the funds that are disbursed from the 401, so be sure to contact a broker or bank to set up a standard IRA or contact a precious metals dealer to set up a gold IRA. The latter is the better alternative because it gives you a chance to hold tangible assets in the IRA.

2. How To Choose Between Gold and Traditional IRAs

As noted above, in a traditional IRA, people are legally allowed to hold intangible assets like stocks, cash balances, mutual funds, ETFs (exchange-traded funds), index fund shares, and a few other things. But they can't hold anything tangible, like gold, silver, platinum, or palladium.

If you're moving from a 401 to an IRA, a gold IRA, also known as a self-directed IRA, gives you total control over the management of the account. Plus, you can offset the effects of inflation and a sinking stock market by holding precious metals. Gold, in particular, has a long history of doing very well when the economy is in bad shape, as it is in the 2020s, with record high inflation, a volatile and declining stock market, and weak employment statistics.

Do a little online research to find the top precious metals firms. Contact one of their reps and let them know you want to do a 401-to-IRA rollover. They'll walk you through the process described in Step 3 below.

3. Steps For Rolling a 401k Into a Gold IRA

A knowledgeable agent for a precious metals firm can take care of all the paperwork for any new account holder. They'll let you know when they receive the information from the 401 administrators, walk you through the paperwork for choosing a gold IRA custodian who's approved by the IRS, help you select an IRS-approved storage facility, and assist you with purchasing the actual metals that will become the assets in your new gold IRA.

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What You Must Know Before Doing a 401k Rollover

Crucial Decision: Having Multiple IRAs

People often talk about retirement accounts as if the law only allows them to have one IRA or one 401(k). In fact, any person can open and maintain as many retirement accounts as they wish. What's the catch?

The catch-22 is that no matter how many accounts you have with retirement money in them, you *must* abide by the contribution limit per person annually. So, for example, if you choose to have two IRAs, one "gold" and one traditional, you're still bound by federal law for maximum annual contributions.

What's the current law? For 2023, individuals can contribute up to $6,500, total, into IRAs, no matter how many IRAs they have. The law is actually a very good thing for investors who like to diversify the kinds of IRAs they maintain. A person could choose to put $3,250 per year in a traditional IRA and $3,250 into a gold IRA or any combination that does not exceed their total limit of $6,500 annually.

Pro Tip: Anyone who will reach the age of 50 anytime during the year 2023 can contribute an additional $1,000, meaning that people who will celebrate their 50th birthday sometime in 2023 can contribute up to $7,500 to any kind of IRAs they have, as long as they don't exceed that limit.

Decide and Take Action

Adults who want to roll over a 401 should get started as soon as possible. That's because even if all the steps go smoothly, it can take up to 60 days to finalize the paperwork. The potential red tape and possible delays come with the employer side of things. Some plan administrators of 401's don't act so quickly. So, if you're aiming to open a gold IRA any time in 2023, it's wise to get started immediately.