Choosing a Financial Services Company
Choose one company to be the custodian of your retirement account. If you manage your own investments, you might choose Vanguard, Fidelity, or Charles Schwab. If you are working with a financial advisor, they will have a brokerage or custodian they use and will open the necessary accounts there.
Some people mistakenly believe they need to spread their money across multiple companies to diversify their investments. This is not true. You can open an account with one company and within that account, you can allocate your money across multiple types of investments.
Using a trusted custodian helps protect your accounts from various types of fraud, and having your money with one company makes managing your retirement funds and distributions much easier.
Understanding the Types of Retirement Accounts That Can Be Combined
Common retirement account types can be transferred into one IRA and one Roth IRA account. For example, once you leave your employer, you can transfer your 401(k) account into an IRA account. This procedure is called a rollover. When transferring funds from a 401(k) to an IRA using a rollover, there are no taxes due, as it is considered a direct transfer from one type of retirement account to another. In your new IRA account, you will only pay taxes when you withdraw money. If you are between 55 and 59 and a half, make sure you understand the rules regarding retirement age for a 401(k) account before deciding to move money from a 401(k) account.
401(k), 403(b), SEP, SIMPLE, KEOGH accounts, individual 401(k) accounts, and some 457 plans can be rolled over into one IRA account. Having everything in one account makes it easier to update and change beneficiaries, manage investments, and withdraw funds. Once you reach age 72, you must begin to take required minimum distributions, which can be complicated when managing dispersed accounts.
If you have after-tax contributions in your 401(k) or other retirement accounts, they can usually be transferred to a Roth IRA. Alternatively, you may find it beneficial to convert some of your tax-deferred contributions in your 401(k) to a Roth IRA. This will incur an immediate tax bill, but future tax-free growth may leave you in a better position in the long run. A financial advisor and/or tax professional can provide some guidance on this matter.
In some cases, you can enter retirement with three accounts or fewer: an IRA, a Roth IRA, and a brokerage/savings account/mutual fund account which is not a specific type of retirement account.
Creating a Rollover IRA Account
First, you must have an IRA account open and an account number. You can open an account with the financial institution of your choice without funding it. Just let them know that you will be transferring a 401(k) or other retirement account to that account.
Next, contact your former employer or retirement plan administrator (look for contact information in your retirement account statement) and tell them that you want to roll over the funds from your 401(k) account into your IRA account. They will likely send you paperwork that you need to complete. Some companies may process the rollover over the phone if you provide them with new custodian information and your IRA account number.
Some retirement plans insist on sending the check to you, and you will have to quickly send it to your new IRA custodian. The IRA rollover process must be completed within a 60-day timeframe; otherwise, it will be considered a taxable distribution.
Offers
Some retirement plans involve transferring funds via wire transfer or sending them directly to your new IRA custodian. Ask if they offer this option, and if they do, it may be best for you to let them send the funds directly.
Choosing Investments in Your IRA Account
Once the funds are consolidated into one account, you can choose the types of investments that belong to this account. Set up an investment plan and ensure that the investments you choose will align with the expected withdrawals you will need to make.
For example, if you know you will need to withdraw $20,000 next year, you do not want to invest that $20,000 in something reckless or risky like a stock fund. You want it in something safe so that you don’t have to worry about part of your account being less than $20,000 when you need it.
The Balance does not provide tax, investment, or financial services or advice. The information is provided without regard to the investment objectives or risk tolerance or financial circumstances of any specific investor and may not be suitable for all investors. Investing involves risk, including the potential loss of principal.
Sources:
Internal Revenue Service. “Contributions to Individual Retirement Arrangements (IRAs).” Internal Revenue Service. “401(k) Resource Guide—Plan Participants—General Distribution Rules.” Internal Revenue Service. “Retirement Topics—Required Minimum Distributions (RMDs).” Internal Revenue Service. “Rollover Chart.” Internal Revenue Service. “Rollovers of Retirement Plan and IRA Distributions.”
Source: https://www.thebalancemoney.com/how-to-transfer-old-401-k-s-to-an-ira-2388218
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