Roll Over An Ira To A : The Pros And Cons
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In the world of retirement account rollovers, theres one type that doesnt get much love: the IRA-to-401 maneuver, which allows you to roll pretax traditional IRA assets into a 401. Its frequently overshadowed by rollovers in the other direction 401 to a rollover IRA because theyre more common. But in some cases, this less common move is also worth considering.
Move Money Into The Tsp
Whether youre a civilian employee, a member of the uniformed services, or a separated participant, you can move money from other eligible plans to your existing TSP account. However, you cannot open a TSP account by transferring money into it.
Things to know:
We will accept both transfers and rollovers of tax-deferred money from traditional IRAs, SIMPLE IRAs, and eligible employer plans such as a 401 or 403 into the traditional balance of your account.
We will accept only transfers of qualified and non-qualified Roth distributions from Roth 401s, Roth 403s, and Roth 457s into the Roth balance of your account. If you dont already have a Roth balance in your existing TSP account, the transfer will create one.
We will not accept Roth rollovers that have already been paid to you and will not accept transfers or rollovers from Roth IRAs.
The Benefits Of Rolling Over Your 401 When You Leave A Job
Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018. Thomas’ experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning.
Whenever you change jobs, you have several options with your 401 plan account. You can cash it out, leave it where it is, transfer it into your new employer’s 401 plan , or roll it over into an individual retirement account .
Forget about cashing it outtaxes and other penalties are likely to be staggering. For most people, rolling over a 401or the 403 cousin, for those in the public or nonprofit sectorinto an IRA is the best choice. Below are seven reasons why. Keep in mind these reasons assume that you are not on the verge of retirement or at an age when you must start taking required minimum distributions from a plan.
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How Do I Transfer From An Active 401k With A Current Employer
- Contact your 401k administrator.
- Transfer part of your 401k to a Qualified Retirement Plan
- Explain that you are not taking a distribution you simply want to transfer part or all of the 401k funds to a qualified plan.
Expect some resistance 401k trustees get paid based on the number of dollars they have under management. Hence, they seek to avoid letting go of money. You may have to ask more than one person and you may need to ask more than one time.
If you get resistance from your current 401k trustee here are a few other points you may want to make when you speak with them.
- Let them know if you are over age 59½.
- Let them know if any of the funds in the 401k are funds you transferred in from another job you had.
- Ask if they would transfer only the funds you contributed to your plan.
If your 401k trustee will allow a transfer we suggest you start your new IRA before you begin the transfer. That will allow the transfer to move directly from the 401k to the new IRA account smoothly.
For information about the Self Directed IRA or Solo 401k, call IRA Club at 312-795-0988
IRA Club offers no investments, products, or planning services. Therefore, please consult your attorney, tax professional, financial planner, and any other qualified person before making any investments.
Keeping The Current 401 Plan
If your former employer allows you to keep your funds in its 401 after you leave, this may be a good option, but only in certain situations. The primary one is if your new employer doesn’t offer a 401 or offers one that’s less substantially less advantageous. For example, if the old plan has investment options you cant get in a new plan.
Additional advantages to keeping your 401 with your former employer include:
- Maintaining performance:If your 401 plan account has done well for you, substantially outperforming the markets over time, then stick with a winner. The funds are obviously doing something right.
- Special tax advantages: If you leave your job in or after the year you reach age 55 and think you’ll start withdrawing funds before turning 59½ the withdrawals will be penalty-free.
- Legal protection: In case of bankruptcy or lawsuits, 401s are subject to protection from creditors by federal law. IRAs are less well-shielded it depends on state laws.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 does protect up to $1.25 million in traditional or Roth IRA assets against bankruptcy. But protection against other types of judgments varies.
If you are going to be self-employed, you might want to stick to the old plan, too. It’s certainly the path of least resistance. But bear in mind, your investment options with the 401 are more limited than in an IRA, cumbersome as it might be to set one up.
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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.
Why You Should Move Your 401 Into An Ira
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The 401 is a blessing for many people, as it allows them to build wealth over time using dollar-cost averaging. Still, sometimes it makes more sense to channel some of that money from the employer-based account into your own individual retirement account. The ever-astute Rick Kahler, the founder of Kahler Financial Group, in Rapid City, S.D., tells us why:
Larry Light: Why and when should you move your 401 into an IRA?
Rick Kahler: If your employer offers a 401 or other retirement plan, contributing to that plan is a foundation of your retirement savings. However, as you approach retirement age, you might consider moving some of your retirement funds out of your employer’s plan and into an IRA at a custodian like TD Ameritrade or Fidelity.
Such a rollover is often done when you leave an employer, though many employers give you the option of keeping your retirement account with them. What isnt popularly understood is that you also can do a rollover while you’re still employed, as long as you are over 59½.
Light: Why do this?
Kahler: One reason to consider leaving your employers plan is that most of them have higher overall fees than an IRA, especially if you choose from low-cost index mutual funds or exchange traded funds from a company like Vanguard or Dimensional Fund Advisors. Its not uncommon to save up to 1% annually by making a rollover into these mutual funds.
Light: What about withdrawing the money to live on? Is there a difference?
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Reasons You May Want To Roll Over Now
- Diversification. Investment options in your 401 can be limited and are selected by the plan sponsor. Rolling your funds over into an IRA can often broaden your choice of investments. More choices can mean more diversification in your retirement portfolio and the opportunity to invest in a wider range of asset classes including individual stocks and bonds, managed accounts, REITs and annuities.
- Beneficiary flexibility. With some IRAs, you may be able to name multiple and contingent beneficiaries or name a trust as the beneficiary. Other IRAs may allow you to impose restrictions on beneficiaries. These options aren’t usually available with 401s. But, keep in mind, not all IRA custodians have the same rules about beneficiaries so be sure to check carefully.
- Ownership control. You are the owner and have access rights with an IRA. The assets in your IRA are also not subject to blackout periods. With a 401 plan, the qualified plan trustee owns the assets and assets may be subject to blackout periods in which account access is limited.
- Distribution options. If your IRA is set up as a Roth IRA, there is not a set age when the owner is required to take minimum distributions. With 401 plans and traditional IRAs, the owner will have to take required minimum distributions by April 1 of the year after they turn age 72.
Disadvantages Of Rolling Over Your 401
1. You like your current 401
If the funds in your old 401 dont charge high fees, you might want to take advantage of this and remain with that plan. Compare the plans fee to the costs of having your money in an IRA.
In many cases the best advice is If it isnt broke, dont fix it. If you like the investment options you currently have, it might make sense to stay in your previous employers 401 plan.
2. A 401 may offer benefits that an IRA doesnt have
If you keep your retirement account in a 401, you may be able to access this money at age 55 without incurring a 10 percent additional early withdrawal tax, as you would with an IRA.
With a 401, you can avoid this penalty if distributions are made to you after you leave your employer and the separation occurred in or after the year you turned age 55.
This loophole does not work in an IRA, where you would generally incur a 10 percent penalty if you withdrew money before age 59 1/2.
3. You cant take a loan from an IRA, as you can with a 401
Many 401 plans allow you to take a loan. While loans from your retirement funds are not advised, it may be good to have this option in an extreme emergency or short-term crunch.
However, if you roll over your funds into an IRA, you will not have the option of a 401 loan. You might consider rolling over your old 401 into your new 401, and preserve the ability to borrow money.
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There Are Many Reasons To Consider Rolling Your 401 Into An Ira
- You generally have more investment choices with an IRA than with a 401
- You can freely allocate your IRA dollars among different IRA trustees, and there is no limit on how many direct, trustee-to-trustee IRA transfers you can do in a year. With an employers plan, you cant move the funds into a different trustee unless you leave your job and rollover the funds.
- The distribution options may be more flexible with an IRA than with your 401.
- You have more control over your investments the closer you get to retirement.
*This is a chart of what the Internal Revenue Service regards as permissible when rolling funds over from one type of retirement account to another. This chart is for informational purposes only and is not legal, tax and investment advice. Always check with a tax advisor before rolling funds between plans.
Gift Money After Reviewing The Gift Tax Rules
Beginning in 2018, you can gift up to $15,000 to a person in a year without IRS interfering with your transaction. If you are gifting more than that amount, you need to file a gift tax return. That doesnt mean that you have to pay a tax on the gift. It means that $15,000 is eligible for lifetime exclusion. This is the amount you can gift away during your lifetime without incurring a gift tax. The total lifetime tax exclusion for gifts is $11.2 million per individual so, gift tax rules are not much of a concern for most people.
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How To Transfer From Your 401 To An Ira
When youre ready to make the transfer, you need to do three things:
Unfortunately, you typically have to go through your former employer or a vendor they use. With many 401 plans, you cannot request a transfer using paperwork from the receiving IRA custodian.
Who to Contact
If you work for a large company, you can most likely contact your 401 provider directly. For example, contact Fidelity, Vanguard, or whatever website you use to manage your account. Alternatively, call whoever prints your 401 statements. If you work for a small company, you may need to contact the human resources department, which might just be the person who hired you. Either way, you eventually need one of the following:
A financial advisor like me can guide you through the process if you have questions.
What to Say
Where to Deposit
Indirect vs. Direct Rollovers
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Why Might You Consider An In
When you have a 401, you dont have maximum control over the types of assets you can hold, such as mutual funds, stocks, and bonds. You typically have a limited menu of options.
Through an in-service rollover, transferring some or all of your 401 funds to a personal IRA can open up more options for your assets. For instance, you might be able to put money into alternative assets like precious metals . A bonus is that you usually can keep contributing to your employers 401 after youve moved funds to an IRA.
Furthermore, an in-service rollover enables your personal financial advisor to provide more hands-on help since at least some of your assets are in an IRA that you control and not in an employer-sponsored 401 that could come with strings attached.
Plus, some 401 plans have annual fees with their options that are way above average. If youre stuck in one of those, you can minimize your costs by rolling your 401 money into an IRA with a lower-cost fund company, explains Rick Salmeron, a certified financial planner.
On top of that, you might be permitted to make tax-free withdrawals from an IRA that you wouldnt be able to make from a 401.
With your funds in an IRA, you are the account owner and have more control over your assets, free from the restrictions your employer-sponsored plan can impose, Salmeron adds.
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 can’t 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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