Why you need to know this: If you ever leave your job, you need to figure out what to do with your 401(k).
When I quit my fancy startup job and left behind all my lovely benefits — my health insurance, stock options and 401(k) matching — to work for The Awl Industrial Complex, I had to figure out what to do with my 401(k). If we started a new company 401(k) plan with excellent and cheap investment options, I might have rolled the money from my old retirement account into that alternative. Of course, creating a 401(k) plan is pretty much out of the question when you’re bootstrapping a website from scratch, but this actually makes my life easier! I can just roll my old 401(k) into a Roth IRA from a brokerage firm of my own choosing.
And if you have ever left a job, this is a thing you should do! You need to rollover your 401(k) into an IRA, because you don’t want your money sitting in your old company’s investment plan (unless that plan is amazing, but the odds are that it isn’t). If you don’t do anything, you’ll miss out on better investment opportunities, or your old company might cash you out of their plan, and send you a check. This might sound awesome (a check!), but it is actually terrible! Because unless you’re 59 1/2 years old, the IRS counts this as an early withdrawal, and you will have to pay income tax on that money, plus a 10 percent penalty.
So! Roll it over. It’s really easy. Here’s what you do:
Step One: Open up an IRA at the brokerage firm of your choosing (more information here).
Step Two: Call the customer service line for the brokerage firm where you are opening your IRA account and tell them you’d like to rollover your 401(k) into an IRA. This is a very common request — and they want you to trust them with your money! — so they’ll walk you through everything you need to do and answer any questions you may have.
Step Three: Have the account information where your old 401(k) resides readily available. Customer service may be able to call your old 401(k) company and get everything settled in one simple, painless phone call.
Step Four: Fill out any paperwork your new brokerage firm requires from you. If the customer service representative hasn’t been able to get your old company to transfer the cash to your new account, you’ll have to call the customer service line at your old company and ask them to transfer your funds into your new IRA. Don’t let your old company send you a check (see terrible penalties above).
You’re good to go! Now all you have to do is remember to continue making your contributions, manage your investments, and dream about all the things you can do with your money when you’re ready to retire.