The Dos and Don'ts of 401(k) Rollovers

Most of the time, your 401(k) chugs along quietly, accumulating money and future benefits.

But when it's time to think about transferring your account to a new employer plan, you face a dizzying array of questions and considerations. These do's and don'ts will help you roll over your 401(k) without getting seasick.

Don't get hung up on mastering the technicalities of this process, says Tom Rankin, business administration instructor for Wake Tech Community College in Raleigh, North Carolina. "Worry less about the exact rules, and focus more on knowing how to access and look up the rules," he says. "Understand the laws, but don't memorize them, because they're always changing. It's more important to know the key questions to ask when you take a new job and when you are changing your account."

Do ask these basic but important questions of the new fund administrator, Rankin says:

-- What are the fee structures? Low fees typically translate to higher returns.

-- What is the employer match?

How can you consistently escalate your 401(k) contributions to achieve your goals? Consider diverting a portion of each raise to your 401(k) account, Rankin says. "Keep it simple, and keep it automatic," he says.

Don't forget to review your account to make sure you don't have any outstanding loans or withdrawals you will have to pay back in full before you can accomplish the rollover. It's easy to forget you are paying back a 401(k) loan if the repayment is automatically funneled from your paycheck, financial advisors say. Get in touch with the plan administrator and find out exactly what you need to do to restore the funds so the account qualifies for a rollover.

To avoid loans against your account in the future, do insulate your 401(k) from emergencies by first seeding, then regularly feeding, a rainy day fund, Rankin says. This ensures you won't be tempted to borrow against your 401(k) for routine situations, such as paying for a new refrigerator. Even a couple of thousand dollars can provide the buffer you need to shield your 401(k) from temptation, he says.

Do integrate your 401(k) into your estate and disability plan, Rankin recommends. Your loved ones and heirs need to know how to access the account in case you are not able to manage it. Designate someone as the executor when you set up the new account. Don't forget about prior spouses. As annoying as it may be, you may have to get a signature and releases from a former spouse to roll over your 401(k).

Don't overlook the special circumstances of owning company stock, says Mike Piershale, president of Piershale Financial Group in Crystal Lake, Illinois. In some circumstances, you might be able to claim special tax breaks if you own company stock, and Internal Revenue Service rules will probably require you to sell the company stock in a certain way. Make sure to scope out the long-term capital gains implications before making a move, Piershale says. "This typically applies to people who've been at the same company for at least five years and typically much longer," he says.

In fact, if you are rolling over the account because you are leaving a job you have had for a long time, take the time to review your portfolio diversification and your next stage of investing goals, Piershale adds.

Don't assume you must take the money with you when you move to a new employer, says Lenny Sanicola, senior practice leader with WorldatWork, a benefits association based in Scottsdale, Arizona. "You don't have to take it out," he says. You may want to leave the account with your current employer's fund in the following scenarios:

-- There is no 401(k) or equivalent plan at your new employer.

-- You are going to start a company or become self-employed.

-- You need to figure out how your retirement accounts mesh with those of your partner and where you may find efficiency.

-- You need to take time to review your retirement and investing plans, options and goals before redirecting the 401(k).

Take your time, Sanicola says, and don't give in to your former employer's promptings for closure. It's much better to leave your 401(k) parked in a former employer's plan than withdraw the money in a lump-sum distribution. That is the single biggest no-no, financial advisors agree. If you get a check for the funds, you will probably pay an early withdrawal penalty of as much as 10 percent, wiping out years of gains. The money will also probably be subject to regular income taxes, erasing even more gains. And the IRS will force your former employer to withhold 20 percent of the funds, which you can reclaim by filing special forms when you do your income tax return.

"Keep your hands off the money," Sanicola says.