Rolling Over Assets From a Former Employer’s Retirement Plan

Once an employee stops working for a company, he/she can “roll over” the savings that have accumulated in the employer’s retirement plan to an individual retirement account (IRA). This document will guide you through that process. 

The term “rollover” simply refers to the act of transferring the assets from the employer’s plan to an IRA account. Only vested savings can be rolled over; unvested savings will be forfeited.

Key Considerations When Rolling Over Assets from a Retirement Plan

The critical step in the rollover process is for the employee to select a “direct rollover.” This means that the assets are directly transferred from the employer’s plan to the financial institution administering the IRA account. The employee never takes possession of the assets. There is no immediate tax impact from a direct rollover, since the IRS is assured that the employee can’t access and use the funds. As a result, all of the tax benefits associated with the retirement account are preserved.

The employee should not select the option to personally receive the assets. If this option is selected, the IRS requires the employer to withhold 20% of the balance for federal taxes, and an additional amount for state taxes, and report the remaining balance to the IRS as taxable income. This greatly complicates the rollover process and potentially eliminates the tax benefits associated with the retirement account.

In general, employers don’t force ex-employees to do a rollover, but there are a few advantages for an ex-employee to initiate a rollover.

  • Lower fees. Employer sponsored retirement plans charge administrative fees that aren’t charged by IRA accounts.
  • Greater investment choice. Employer sponsored retirement plans generally offer a few investment choices, while IRA accounts often have a much broader range of choices.
  • Ease of organization. An employee can rollover retirement plan assets from multiple old employers into a single rollover IRA. Many people like to consolidate their assets into fewer accounts to make them easier to organize and track.

To initiate the rollover, the employee should contact both the institution administering the employer’s retirement plan as well as the institution that will administer the IRA. Each institution will have paperwork that needs to be filled out.

Many financial institutions will accept rollover assets. Banks often limit the investment choices to bank products (CD’s for example) while investment companies offer much broader choices.

Three major investment companies that accept rollover assets are Fidelity, Vanguard, and Schwab. All three have lots of information online about the rollover process, and call centers to answer questions.

The IRA application will ask whether the investor wants to open a Roth or Traditional IRA. If the employer’s retirement plan consists solely of pre-tax money, then a Traditional IRA is the appropriate selection. If the plan was a Roth 401(K), the client should call the financial institution and ask how to proceed. This is because the plan may contain both pre-tax and after-tax amounts.

The application will also prompt the investor to make investment choices. If the client is unsure how to proceed, he/she may wish to select a conservative option in the application (say a money market fund) and then make final investment options later, once he/she has done some research and completed some financial education related to investment basics. 

Related Resources

Thinking About Opening an IRA?

An IRA is an account that helps people save for retirement, even if they don’t have access to an employer-based retirement plan. This resource includes some commonly asked questions and answers.

Traditional vs. Roth IRA

Traditional and Roth IRAs are similar in that they are special account types designed to help workers and their spouses save for retirement. This guide provides an overview of key similarities and differences.

The Power of Saving Early for Retirement

The sooner you start saving for retirement, the more time your money has to grow. This resource demonstrates this with two examples.