Do You Have a 401(k) at a Former Employer? You can roll it over into a self-directed IRA

Published on November 28, 2023

According to the Investment Company Institute’s 401(k) Center, 401(k) plans held $6.3 trillion in assets as of September 30, 2022. The assets were in more than 625,000 plans on behalf of approximately 60 million active participants and millions of former employees and retirees. 

Further, the savings that were rolled over from 401(k)s and other employer-sponsored retirement plans represented about half of the $11.0 trillion held in individual retirement account (IRA) assets as of September 30, 2022.

However, there are many inactive 401(k) plans that have been left behind when employees left their jobs.

• In an article published by CNBC this past August, about 50.5 million people left their jobs in 2022—a new record high—as part of the continuing Great Resignation.
• Those workers left behind many 401(k) accounts with balances that average $55,400.
• The job-switching across U.S. workplaces drove up the number of forgotten 401(k)s.
• A 2023 analysis by Capitalize estimates there are 29.2 million left-behind or forgotten 401(k) accounts holding approximately $1.65 trillion in assets.
  • This figure is up from 24.3 million and $1.35 trillion in May 2021 and represents 25% of all 401(k) plan assets.

Taxpayers who are leaving their accounts at a former employer are leaving a lot of money on the retirement savings table!

Leave the job, take the 401(k) assets

If you choose to go to another employer or decide to retire, there is no reason to leave your old plan behind and let it go inactive. Think of all the opportunities you’ll miss to rebalance your portfolio or add to your retirement savings. Plus, you’ll pay administrative fees and penalties for an inactive account—and risk losing your retirement savings as a “missing participant” if your former employer is unable to find you due to outdated contact information.

You can merge the funds with the 401(k) at your new job if one is offered; cash out the old 401(k) if you need the money immediately; or roll over the funds into a self-directed IRA and take advantage of the broad array of alternative assets a self-directed retirement plan allows.

What happens with a rollover?

Unlike a transfer (which moves funds between two similar retirement accounts), a rollover moves assets between two different kinds of retirement accounts, such as from a 401(k) or another qualified plan into an IRA.

If you have an old 401(k) and you want to roll over the funds into a new self-directed IRA, you must notify the previous financial institution of your plans and complete the required paperwork to move the funds to the new custodian.

The financial institution that is sending the funds must file IRS Form 1099-R, which tells the IRS money is moving between the two different types of accounts and that there may be a temporary distribution. The institution that is receiving the funds (the IRA custodian) will file Form 5498. You must note the rollover on your tax return.

The same amount of funds must be rolled over from the former to the new account. There are no tax triggers when this is done correctly.

The rollover may be direct or indirect.

• Direct rollover: The funds are moved directly from your existing retirement account (such as the one from your former employer) into a new self-directed IRA. The account owner initiates the transaction by notifying the previous financial institution and completing the required paperwork to roll over the funds to the new custodian of your self-directed IRA.
• Indirect rollover: the funds are distributed to you first and then you have 60 days from the date of that 401(k) distribution to deposit the money into your new self-directed IRA. Doing an indirect rollover could trigger required tax withholding by the plan administrator at your former workplace. You’ll receive a check for the net amount minus the withheld tax.

As always, we recommend you discuss this with a trusted financial advisor to make sure you conduct the rollover in the best way possible for your specific tax scenario.

Lost track of your old plan? Here’s how to find it.

Before you initiate a 401(k) rollover, contact the human resources department of your previous employer or check old account statements to get all the information you need to start the transaction.

If that leads nowhere, search for your lost plan on the National Registry of Unclaimed Retirement Benefits, or search the database available through the National Association of Unclaimed Property Administrators. The U.S. Department of Labor also has an abandoned plan database.

Open a self-directed IRA with Next Generation

As a full-service administrator and asset custodian for self-directed retirement plans, Next Generation is here to help. You can open a new self-directed IRA and follow the steps in our starter kits to implement a rollover from your old 401(k) into your new plan. You can build a more diverse portfolio with alternative assets you know and understand—and include real estate, precious metals, royalties, private equity funding, commodities, and many more nontraditional investments to grow retirement wealth. We offer a complimentary educational session to review the many options and benefits that self-direction allows, and our team will ensure that your rollover is conducted in accordance with IRS guidelines. Contact us with any questions you have.