Cashing Out: The Last Resort
Avoid this option except in true emergencies. First, you will be taxed on the money. In addition, if you’re no longer going to be working, you need to be 55 to avoid paying an additional 10% penalty. If you’re still working, you must wait to access the money without penalty until age 59½.
Most advisors say that if you must use the money, withdraw only what you need until you can find another income stream. Move the rest to an IRA or similar tax-advantaged retirement plan.
Option : Roll Over Your Old 401 Into An Individual Retirement Account
Still another option is to roll over your old 401 into an IRA. The primary benefit of an IRA rollover is having access to a wider range of investment options, since youll be in control of your retirement savings rather than a participant in an employers plan. Depending on what you invest in, a rollover can also save you money from management and administrative fees, costs that can eat into investment returns over time. If you decide to rollover an old 401 into an IRA, you will have several options, each of which has different tax implications.
You Have Less Than $1000 In Your 401
If you have less than $1000 in your 401, you may request to get a lump sum payment via check. Still, if you leave the funds behind without giving any instructions to the employer, the plan administrator may force cash-out in order to close the account.
Usually, active 401 accounts incur costs to maintain, and your employer may be unwilling to bear the cost since you will no longer contribute to the plan. The employer will send you a check within 3 to 10 days of leaving the job. Once the payment is made, you have 60 days to deposit the funds into an IRA to avoid paying taxes. If you donât deposit the funds into an IRA, the payment will be considered an early withdrawal and you will pay an income tax and early withdrawal penalty.
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What To Do With Employee Stock
If you have employee stock through your former employer, youll also have to decide what to do with those shares. In the case of stock you already own, Deering advises that it might make sense to sell those shares. At the very least, ensure the stock doesnt make up a disproportionate percentage of your portfolio, as can sometimes happen with employee stock.
According to Deering, the primary consideration is whether theres anything that prevents you from selling the stock. In some cases, there may be lock-up periods that bar you from selling your shares for a particular amount of time. And if youve owned the shares for less than one year, then it makes sense to hold them until the one-year mark when you qualify for long-term capital gains tax treatment.
If you have any remaining stock options, those will likely expire within three months of leaving the company. Whether you choose to exercise those should depend on the current stock price compared to the price your options allow you to purchase them at, as well as how much of the companys stock you already have in your portfolio.
Move Your Old 401 Assets Into A New Employers Plan
You have the option to avoid paying taxes by completing a direct, or “trustee-to-trustee,” transfer from your old plan to your new employer’s plan, if the employer’s plan allows it.
It can be easy to pay less attention to your old retirement accounts, since you can no longer contribute. So, transferring old 401 assets to your new plan could make it easier to track your retirement savings.
You also have borrowing power if your new retirement plan lets participants borrow from their plan assets. The interest rate is often low. You may even repay the interest to yourself. If you roll your old plan into your new plan, youll have a bigger base of assets against which to borrow. One common borrowing limit is 50% of your vested balance, up to $50,000. Each plan sets its own rules.
Here are a few important steps to take to successfully move assets to your new employers retirement plan so as not to trigger a tax penalty:
Step 1: Find out whether your new employer has a defined contribution plan, such as a 401 or 403, that allows rollovers from other plans. Evaluate the new plan’s investment options to see whether they fit your investment style. If your new employer doesn’t have a retirement plan, or if the portfolio options aren’t appealing, consider staying in your old employer’s plan. You could also set up a new rollover IRA at a credit union, bank, or brokerage firm of your choice.
The instructions you get should ask for this type of information:
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Leave Your Account Where It Is
Many companies allow you to keep your 401 savings in their plans after you leave your job. Often that’s only if you meet a minimum balance requirement, typically $5,000. Since this option requires no action, it is often chosen by default. But leaving your 401 where it is isnt always a result of procrastination. There are some valid reasons to do it.
You can take penalty-free withdrawals from an employer-sponsored retirement plan if you leave your job in or after the year you reached age 55 and expect to start taking withdrawals before turning 59 1/2.
Other reasons you may want to keep your retirement plan where it is include:
Considering A 401 Rollover Consider Your Options First
If you decide a 401 rollover is right for you, we’re here to help. Call a Rollover Consultant at .
One great thing about a 401 retirement savings plan is that your assets are often portable when you leave a job. But what should you do with them? Rolling over your 401 to an IRA is one way to go, but you should consider your options before making a decision. There are several factors to consider based on your personal circumstances. The information provided here can help you decide.
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What Happens With A 401 Loan When I Move To A Different Company
Most 401 retirement plans allow you to take out loans, which usually must be repaid within five years. If you change employers, however, the clock speeds up and a loan you’ve taken out from your 401 may be due in full very quickly. Even worse, you may face serious tax consequences if you can’t repay it.
Rolling 401 Assets Into An Ira
When you retire or leave your job for any reason, you have the right to roll over your 401 assets to an IRA. You have a number of direct rollover options:
Rolling your traditional 401 to a traditional IRA. You can roll your traditional 401 assets into a new or existing traditional IRA. To initiate the rollover, you complete the forms required by both the IRA provider you choose and your 401 plan administrator. The money is moved directly, either electronically or by check. No taxes are due on the assets you move, and any new earnings accumulate tax deferred.
Rolling your Roth 401 to a Roth IRA. You can roll your Roth 401 assets into a new or existing Roth IRA with a custodian of your choice. You complete the forms required by the IRA provider and your 401 plan administrator, and the money is moved directly either electronically or by check. No taxes are due when the money is moved and any new earnings accumulate tax deferred. Earnings are eligible for tax-free withdrawal once the IRA has been open at least five years and you are at least 59½.
Rolling your traditional 401 to a Roth IRA. If your traditional 401 plan permits direct rollovers to a Roth IRA, you can roll over assets in your traditional 401 to a new or existing Roth IRA. Keep in mind youll have to pay taxes on the rollover amount you convert.
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How Much Does It Cost To Roll Over A 401 To An Ira
If you do the process correctly, there should be few or no costs associated with rolling over a 401 to an IRA. Some 401 administrators may charge a transfer fee or an account closure fee, which is usually under $100.
Because moving your money from a 401 to an IRA allows you to avoid the 10% early withdrawal penalty that results if you withdraw money from a 401 before 59 1/2, it’s a far better option if you can’t keep your money invested in an old employer’s plan or move it to a 401 at your new company.
You should consider whether rolling over a 401 to an IRA is a better option than either leaving it invested when you leave your job or moving the money to your new employer’s retirement plan. If you can avoid 401 management fees and gain access to investments with lower expense ratios, an IRA may be a cheaper account option.
How And Why To Transfer Your 401 To An Ira
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By Justin Pritchard, CFP® in Montrose, CO
When you change jobs or retire, you have several options for the money in your 401. You can typically transfer that money to an IRA, leave it in the plan, move it to your new jobs retirement plan, or cash out. In many cases, its smart to move your savings into an IRA. Well cover the pros and cons here so you can decide whats best.
The process can be confusing and intimidating, so its easy to do nothing. But that might result in leaving your savings with an employer that you no longer have any connection to, and one you might even dislike or distrust.
Key takeaway:Read more below, or listen to the explanation .
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Should You Do A Partial 401 Rollover
It really depends on your financial situation and whether or not there is an advantage to leaving part of your money invested in the current 401. Just know that it is possible to move a portion of your money to a rollover IRA while keeping the rest of your money in the existing 401 plan.
Joshua Holt A practicing private equity M& A lawyer and the creator of Biglaw Investor, Josh couldnt find a place where lawyers were talking about money, so he created it himself. He knows that the Bogleheads forum is a great resource for tax questions and is always looking for honest advisors that provide good advice for a fair price.
Keep Your 401 With Your Previous Employer
In this instance, you wont change a thing. Just make sure that you actively monitor your investments in the plan for performance and remain aware of any significant changes that occur.
If you really like your current investment options and are paying low fees on the investments, this might be the right choice for you.
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If You Have An Outstanding 401k Loan
Did you borrow any money from your 401? If you did and youre leaving the company, voluntarily or otherwise, you have the option to repay the loan to an IRA and you have until your personal tax return deadline of the following year to contribute that repayment amount to an IRA explains Mat Sorensen, CEO of Directed IRA and Directed Trust Company, thanks to the 2017 Tax Cuts and Jobs Act.
If you cant pay the loan back in the allotted time, the plan will reduce your vested account balance in order to recoup the unpaid amount, says Ian Berger, IRA Analyst with IRAHelp.com and a colleague of Ed Slott, author of The New Retirement Savings Time Bomb.This is called a loan offset.
I think that many people forget that if they have a loan outstanding, it has to be paid, says Wayne Bogosian, co-author of The Complete Idiots Guide to 401 Plans.
Fail to repay it and the loan amount will count as income, potentially subject to tax, plus youll pay an additional penalty equal to 10 percent of the sum you borrowed if youre younger than age 59 ½, he says.
Taking a loan from your 401 is in reality, borrowing from yourself and may be an appropriate decision for some people who are unemployed with no income source, need money for medical expenses, or are purchasing their first home. However there are many things to consider before doing so.
If you cant pay the loan back to your 401, other than the potential tax implications listed above, the options below still apply.
Common Us Retirement Accounts At A Glance
For all three plans, withdrawals before age 59½ are usually subject to a 10% early withdrawal penalty.
401: An employer-sponsored defined contribution pension account. Similar to an RRSP, contributions are from pre-tax income and funds do not get taxed until theyre withdrawn.
Individual Retirement Account : A self-directed defined contribution pension account. Similar to an RRSP, contributions are from pre-tax income and funds do not get taxed until theyre withdrawn. An IRA can be converted to a Roth IRA. Usually, IRAs are not employer-sponsored.
Roth IRA: A self-directed defined contribution pension account. Similar to a TFSA, contributions are from after-tax income, but funds do not get taxed when theyre withdrawn. Earnings must be held for at least five years prior to withdrawal.
Editors note:The author is a journalist and cannot provide advice.
*A previous version of this story stated that lump sum withdrawals qualify for 15% withholding due to the U.S.-Canada Treaty, as long as the client files Form W8-BEN with the administrator. While some practitioners hold that view, others are more cautious and prefer to assume a 30% withholding. Read more about that here.Return to the corrected sentence.
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Begin The Rollover Process
Youll have to fill out paperwork to conduct your rollover and it may require some back-and-forth conversations with your providers. You have several options to actually move the money from the old provider to the new one, but your best option is a direct rollover.
In a direct rollover, the funds are sent straight from your 401 into your new account without you touching the funds. Its important that you specify a direct rollover so that you dont have the check made payable to you. You could trigger a mandatory 20 percent withholding for taxes, and the IRS charges a 10 percent bonus penalty on withdrawals made before age 59 1/2.
Roll The 401 Over Into An Ira
What if youre not moving to a new employer immediately or your new employer doesnt offer a 401? What if your employer requires you to put in a number of years before you become vested and eligible to participate in their 401 plan?
In these circumstances, stashing your money in an IRA with the financial institution of your choice is a freeing solution. Youll be able to choose where, how, and when you invest unless you agree to pay a broker to manage the funds for you. A direct rollover is ideal to avoid paying taxes on the amount transferred over you have 60 days to roll your 401 over into the new IRA.
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Take Advantage Of An Investment Option In The 401
Conversely, there may be an investment option available in your 401 that is not available in your IRA account. You may want to leave a portion of the funds in your 401 to take advantage of that opportunity. Remember, diversifying your portfolio is extremely important when it comes to investing and if you have access to something special inside your 401, its worth keeping some money there to take advantage of the investment opportunity.
When Not To Transfer To An Ira
You now know some of the benefits of moving your 401 to an IRA. But control over your money isnt the only thing that matters, and you may have other priorities. Its impossible to list every potential pitfall, but a few examples may offer food for thought.
Between age 55 and 59.5
When youre at least 55 years oldbut not yet 59 1/2 years oldyou might want to leave at least some of your money in the 401 plan. 401s allow you to pull money out without penalty after age 55 . IRAs, on the other hand, require that you wait until age 59 ½ to avoid an early-withdrawal penalty of 10% on certain distributions. There are always exceptions and workarounds, but those are the basic rules. If you intend to spend your 401 savings between the ages of 55 and 59 1/2, keep this in mind before making a transfer.
Note: Some public safety workers can avoid early withdrawal penalties from a retirement plan as early as age 50. If you worked for a federal, state, or local government, be sure to explore your options.
Depending on state laws, money in IRAs might be treated differently, and a 401 might offer more protection . Federal law often applies to ERISA-covered 401 plans, while state laws cover IRAs. However, there is some federal protection for IRAs in bankruptcy. When you owe federal tax debts or assets are due to an ex-spouse, protection is usually limited.
Roth Conversions
RMD While Working
Stable Value Offerings
Fees and Expenses
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