Option : Leaving Money In Your Former Employer’s 401 Plan
Leaving money in your current 401 may be an option, depending on the terms of your plan. Many factors including the option to add money and your investment choices depend on the terms of your plan, but typically:
- Ability to add money: Once you leave your employer, you generally won’t be able to add money to your plan.
- Investment choices: 401 plans typically have a more limited number of investment options compared to an IRA but may include investments you can’t get through an IRA.
- Available services: Some plans may offer educational materials, planning tools, telephone help lines and workshops. Your plan may or may not provide access to a financial advisor.
- Fees and expenses: 401 fees and expenses often include administrative fees, investment-related expenses and distribution fees. These fees and expenses may be lower than the fees and expenses of an IRA.
- Penalty-free distributions: Generally, you can take money from your plan without tax penalties at age 55, if you leave your employer in the calendar year you turn 55 or older.
- Required minimum distributions: Generally, you must take minimum distributions from your former employer’s plan beginning at age 72.
Contact your plan administrator to learn more about the terms of your plan, including its fees.
What Is A Health Savings Account
A health savings account is designed for people with high-deductible health plans health insurance policies that have annual deductibles of at least $1,400 for individuals and $2,800 for family coverage .
Also, the plan’s maximum out-of-pocket expense must be less than $7,000 a year for individuals and $14,000 for family coverage for 2021, but for 2022, it’s $7,050 for self-only coverage or $14,100 for family coverage. Premiums don’t count as out-of-pocket costs, but deductibles, copayments, and coinsurance do.
For 2021, the annual contribution limit is $3,600 for individuals and $7,200 for families, while for 2022, it’s $3,650 for individuals and $7,300 for families.
You contribute to an HSA using pre-tax funds, which reduces your taxable income. You can then withdraw money from your HSA tax-free if you use it for qualified medical expenses. If you’re 64 or younger, you’ll owe taxes and a 20% penalty if you use funds for nonmedical reasons. However, after age 65 , withdrawals for nonmedical reasons don’t incur the penalty, although they’re still taxed at your current tax rate.
You can keep your HSA funds in the account to use later in life, such as after you retire. The accountand all the money in itbelongs to you, even if you change health insurance plans, switch jobs, or retire.
You can only make one IRA-to-HSA rollover during your lifetime.
What Happens If I Dont Make Any Election Regarding My Retirement Plan Distribution
The plan administrator must give you a written explanation of your rollover options for the distribution, including your right to have the distribution transferred directly to another retirement plan or to an IRA.
If youre no longer employed by the employer maintaining your retirement plan and your plan account is between $1,000 and $5,000, the plan administrator may deposit the money into an IRA in your name if you dont elect to receive the money or roll it over. If your plan account is $1,000 or less, the plan administrator may pay it to you, less, in most cases, 20% income tax withholding, without your consent. You can still roll over the distribution within 60 days.
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You Might Want A Roth Account
If your 401 plan doesnt provide a Roth 401 option, you might choose to roll your retirement savings into a Roth IRA. Advantages of a 401-to-Roth IRA rollover include:
Avoiding Roth IRA income restrictions. Even if your annual income is above the thresholds for Roth IRA contributions, youre still allowed to roll your 401 savings into a Roth IRA. This move is commonly referred to as a backdoor Roth IRA conversion, and it can grant you the benefits of tax-free withdrawals in retirement.
No required minimum distributions . With a 401or even a traditional IRAyoure subject to RMDs, or the mandated annual withdrawals from your retirement savings once you reach age 72. Roth IRAs are free of RMDs, providing you with more control over your retirement savings.
Tax-free withdrawals in retirement. When you roll over a traditional 401 into a Roth IRA, youll probably end up paying some taxes on the amount youre converting. But these taxes may be less than what youd pay if you took regular withdrawals from a traditional 401 in retirement.
Access to additional death benefits. Because there are no lifetime distribution requirements, you can pass down your Roth IRA to your heirsalthough beneficiaries need to draw down the account within 10 years.
Henderson cautions that you must be aware of the immediate tax consequences when you roll your money from a 401 to a Roth account.
How To Transfer Old 401s To An Ira
As you get near the point where you will need income from your retirement accounts, it is likely you will want to transfer old 401s to an IRA to simplify the process of managing your retirement money.
Many people are not aware that they can combine most of their retirement accounts into a single IRA.
If you have a 401 plan that you need to transfer to an IRA, here are the four steps to take.
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What Is An In
Unlike the traditional rollover, an in-service rollover is probably something youve never heard of and for good reason. First, not all company retirement plans allow for it, and second, even for those that do, the details can be confusing to employees. The bottom line: An in-service rollover allows an employee to be able to roll their 401k to an IRA while still employed with the company. The employee is also still able to contribute to the plan, even after the rollover is complete. Most plans allow this type of rollover once per year, but depending on the plan, you could potentially complete the rollover more often for different contribution types.
When You Don’t Roll Over
Cashing out your account is a simple but costly option. You can ask your plan administrator for a checkbut your employer will withhold 20 percent of your account balance to prepay the tax youll owe. Plus, the IRS will consider your payout an early distribution, meaning you could owe the 10 percent early withdrawal penalty on top of combined federal, state and local taxes. That could total more than 50 percent of your account value.
Think TwiceThe repercussions of taking money out now could be enormous: If you took $10,000 out of your 401 instead of rolling it over into an account earning 8 percent tax-deferred earnings, your retirement fund could end up more than $100,000 short after 30 years.
If your former employers plan has provided strong returns with reasonable fees, you might consider leaving your account behind. You dont give up the right to move your account to your new 401 or an IRA at any time. While your money remains in your former employers 401 plan, you wont be able to make additional contributions to the account, and you may not be able to take a loan from the plan. In addition, some employers might charge higher fees if youre not an active employee.
Further, you might not qualify to stay in your old 401 account: Your employer has the option of cashing out your account if the balance is less than $1,000 though it must provide for the automatic rolling over of your assets out of the plan and into an IRA if your plan balance is more than$1,000.
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Choose Your 401 Rollover Destination
Consider whether a traditional IRA or Roth IRA makes the most sense for your 401 rollover.
401 Rollover to Traditional IRA: If you want to maintain the same tax treatment, this can be a good choice, Henderson says. You avoid extra hassle, and you just see the same RMD and tax treatment as you would with your current 401.
401 Rollover to Roth IRA: For those with high incomes, the 401 rollover to a Roth IRA can serve as a backdoor into a Roth tax treatment. But dont forget about the taxes, Henderson says. In addition, remember the five-year rule when it comes to Roth accounts: Even at 59 ½, you cannot take tax-free withdrawals of earnings unless your first contribution or conversion to a Roth account was at least five years before. Those close to retirement, therefore, may not benefit from this type of conversion. Talk to a tax professional if youre rolling into an account with different treatment, says Henderson.
How To Do A Rollover
The mechanics of rolling over 401 plan are easy. You pick a financial institution, such as a bank, brokerage, or online investing platform, to open an IRA with them. Let your 401 plan administrator know where you have opened the account.
There are two types of rollovers: direct and indirect. A direct rollover is when your money is transferred electronically from one account to another, or the plan administrator may cut you a check made out to your account, which you deposit. The direct rollover is the best approach.
In an indirect rollover, the funds come to you to re-deposit. If you take the money in cash instead of transferring it directly to the new account, you have only 60 days to deposit the funds into a new plan. If you miss the deadline, you will be subject to withholding taxes and penalties.
Some people do an indirect rollover if they want to take a 60-day loan from their retirement account.
Because of this deadline, direct rollovers are strongly recommended. Nowadays, in many cases, you can shift assets directly from one custodian to another, without selling anythinga trustee-to-trustee or in-kind transfer. If, for some reason, the plan administrator cant transfer the funds directly into your IRA or new 401, have the check they send you made out in the name of the new account care of its custodian. This still counts as a direct rollover. However, to be safe, be sure to deposit the funds within 60 days.
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Option : Cashing Out Your 401
While withdrawing your money is an option, in most circumstances, it means those funds will not be there when you need them in retirement. In addition, cashing out your 401 generally means you’ll have to pay taxes on the withdrawal, and there’s typically an additional 10% tax penalty if you’re younger than 59½, unless you left your employer in the calendar year you turned 55 or older.
Special considerations for employer stock/securitiesIf you have stock/securities of your former employer that have increased in value from your original investment, you may be able to receive special tax treatment on these securities. This is referred to as net unrealized appreciation . If you roll the employer stock into a traditional or Roth IRA or move it to your new employers plan, the ability to use the NUA strategy is lost. NUA rules are complex. If you’re considering NUA, we suggest consulting with a tax professional prior to making any decisions on distributions from your existing plan.
Reasons To Avoid A 401 Rollover
There are some cases when it doesnt make sense to roll your 401 into another account:
IRAs are less protected. If you end up declaring bankruptcy later, a 401 offers more protection from creditors than an IRA.
Higher fees. Depending on the situation you could end up with higher fees when you roll an old 401 into a new 401. Check the fees associated with the new account before you move your money.
Limited investment choices. A new employers 401 might have more limited investment choices. If thats the case, you might want to stick with your existing 401 because the assets work better for your situation.
A 401 gives you access to the rule of 55. With a 401, you might be able to begin taking withdrawals from your account penalty-free before age 59 ½ if you leave your employer after age 55. While IRAs dont have this feature, you may be able to emulate it by taking subsequently equal periodic payments from your IRA.
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You Prefer Convenience Over Control
Perhaps you opened an IRA with the intention of putting together a diverse portfolio and actively managing your investments. However, youre now finding that you dont have the time or energy to devote to your portfolio and feel that youre in over your head. Rolling over your IRA to a 401 and giving up some control may better fit your needs as an investor.
What If I Have Both Pretax And After
Generally, pretax assets are rolled into a rollover IRA or traditional IRA. After-tax assets or after-tax savings) are rolled into a Roth IRA.
You can choose to roll pretax savings into a Roth IRA, but doing so would be treated as a taxable event. Similarly, you can roll after-tax savings into a traditional IRA, but this requires careful tracking of your assets for when you start taking distributions. Before deciding, please consult your tax advisor about your personal circumstances.
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Why 401k Rollover To A Traditional Ira
If youre a member of an employer-sponsored 401 plan, there are several good reasons to stick with that plan, especially if the employer offers matching contributions. However, when you leave the job, it might be a good idea to consider taking your money with you, for several reasons:
- Some employers dont allow ex-employees to remain with the plan.
- Others might charge you extra to maintain and manage your account.
- You may be able to access a better selection of investments elsewhere like a discount brokerage IRA account.
- Your investment fees might be lower than those of your 401 plan.
If youve held several jobs over the course of your career and are members of multiple employer-sponsored 401 plans, rolling them all over into a single IRA may be a great way to manage your money in one place.
How Old Are You
If your client is 59½ or younger, theres typically a 10% early withdrawal penalty for both IRAs and 401s . Fortunately, CRA allows the 10% penalty to be claimed as a FTC on the Canadian return in addition to the 15% withholding. On a $100,000 plan, thats $75,000 net the client would also need to owe at least $25,000 in Canadian tax for the transfer to be tax-neutral.
If your client is 70½ or older, she must start withdrawing from the U.S. plan by April 1 of the year following the year the client reached that age. If youre comfortable with where the money is and how its being invested, its probably better to leave it tax-deferred as long as you can, says Altro. You can even withdraw the IRA at a slower pace than a RRIF the minimums are lower than they are in Canada.
If your client is 71 or older, she must convert her RRSP to a RRIF, and its no longer possible to contribute to the RRIF.
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When Do I Have To Withdraw Money From A Roth 401k
The Roth 401 five-year rule determines when you can receive eligible tax-free benefits from your Roth 401 plan account. While this is similar to the five-year rule that applies to the Roth IRA, there are some key differences. Withdrawals from your Roth 401 plan account, including your contributions and any investment income, are completely exempt from taxes and penalties if you meet the five-year lockout period and one of the following also applies:
How To Transfer A Traditional Ira Into A 401
If youve weighed the choices and decided youd like to combine retirement plan balances inside your 401 and your 401 plan provider is ready and willing to take those IRA assets there are steps you need to take to do it right.
First, know that you cant roll a Roth IRA into a 401 not even into a Roth 401. Were specifically talking about pretax money in a traditional IRA here.
As with a 401 rollover, the easiest way to roll a traditional IRA into a 401 is to request a direct transfer, which moves the money from your IRA into your 401 without it ever touching your hands. Contact your 401 plan administrator for instructions on how to do this following its guidance will allow you to avoid taxes and penalties.
About the author:Arielle O’Shea is a NerdWallet authority on retirement and investing, with appearances on the “Today” Show, “NBC Nightly News” and other national media. Read more
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Roth 401 To Roth Ira Conversions
The rollover process is straightforward if you have a Roth 401 and you’re rolling it over into a Roth IRA. The transferred funds have the same tax basis, composed of after-tax dollars. This is not, to use IRS parlance, a taxable event.
If your 401 is a Roth 401, you can roll it over directly into a Roth IRA without intermediate steps or tax implications. You should check how to handle any employer matching contributions because those will be in a companion regular 401 account and taxes may be due on them. You can establish a Roth IRA for your 401 funds or roll them over into an existing Roth.ï»¿ï»¿