Make The Best Decision For You
When it comes to deciding what to do with an old 401, there may be factors that could be unique to your situation. That means the best choice will be different for everyone. One thing to remember is that the rules among retirement plans vary so it’s important to find out the rules your former employer has as well as the rules at your new employer.
Do also compare the fees and expenses associated with the accounts you’re considering. If you find it confusing or overwhelming, speak with a financial professional to help with the decision.
Decide Between A Traditional Or Roth Ira
The type of IRA you roll your old 401 money into will depend on what kind of 401 youre transferring the money from.
In most cases, if you have a traditional 401, youll probably want to roll the money into a traditional IRA. That way, you wont have to pay any taxes on the transfer .
If you had a Roth 401, thats a different story. You could roll the money you contributed into a Roth IRA completely tax-free and continue to enjoy tax-free growth and tax-free withdrawals in retirement. But your employers contributions are treated like traditional 401 contributions . . . so that money needs to either be rolled over into a traditional IRA or you can pay the taxes to roll them into a Roth account.
Easy, right? Traditional to traditional, tax-free today. Roth to Roth, mostly tax-free today and tax-free in retirement.
When To Rollover Your 401 To An Ira
In most cases, youll do a 401 rollover to an IRA when you leave a job. In fact, many employers dont allow you to roll over your funds while youre still with the company.
The good news is that when you leave a job, the timing is flexible as to when you roll the funds over. Many employers allow you to leave money in the plan indefinitely after you leave, meaning you wont have to initiate the rollover right away. Of course, this isnt always the case. Some employers cant manage accounts for old employees, and in that case, youll have to move your funds.
While rollovers are most common when you leave a job, some employers also allow you to roll over funds while youre still with the company. Ultimately, it comes down to your employers rules.
Each 401 plan can be different, so it is important to contact your plan administrator for additional questions and details, Tovar says.
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Keep Your 401 With Your Former Employer
If youre satisfied with the performance of your 401 under your former employer, you may choose to keep it with your old company, provided the account has at least $5,000 in it. Its important to note that a 401 with less than $5,000 may automatically be deposited into an IRA in your name by the plans administrator, depending on the plan. If the account has less than $1,000, the plans administrator may send you a check for that amount.
While you wont be permitted to make new contributions to the 401 if you keep it with your previous employer, your earnings will remain tax-deferred until you take a distribution. Youll also preserve the ability to roll it over in the future.
When comparing your former companys plan to what your new employer offers, lower fees and better investment options may also lead you to keep your 401 with your old company and forgo a rollover.
Should You Stay In The 401 Or Roll Over
Handling the 401 balance at retirement once was an easy decision. In almost all cases, it made sense to have the balance rolled over into an IRA. Things are changing. New retirees might find it advantageous to stay with their 401 plans after retirement.
There are many reasons to transfer out of the 401 plan at retirement. The plan often has limited investment options, while an IRA at a mutual fund family could invest in any fund at that family and an IRA at a broker could invest in a wide range of funds at different fund families.
Distribution options are a big reason to roll over the account to an IRA. A 401 plan is not required to provide all the distribution options open to IRA owners. Stretch out distribution schedules that could make distributions over many years are not required to be offered. And those who inherited 401s can be forced to withdraw the entire account, and pay taxes on it, in a short time.
A number of companies actively discouraged former employees from staying with the plan by limiting their distribution options and the ability to change investments, prohibiting loans, and imposing other restrictions.
Several things have changed.
In addition, funds that are closed to new investors often remain open to contributions from 401 plans .
These changes do not mean that every retiring employee should leave his or her account in a 401 plan instead of rolling it over into an IRA.
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When To Roll Over Your 401 To An Ira
Rolling over your 401 to an IRA is possible only if youre leaving your current employer or your employer is discontinuing your 401 plan. It is an alternative to:
- Leave your money invested in your existing 401
- Rollover to your new employers 401
- Withdrawal from your 401, which would trigger a 10% penalty if you arent 59 1/2 or older
A rollover or IRA) does not have tax consequences. This would not be the case if you do a rollover to a Roth IRA.
Rolling over a 401 to an IRA provides you with the opportunity to choose which brokerage you want to hold your retirement funds. It may be the right choice if:
- Your new employer doesnt offer a 401 plan
- You cannot keep your money invested in your current workplace plan because your plan is being discontinued or your 401 administration wont allow you to stay invested for some other reason
- Your new employers 401 plan charges high fees, offers limited investments, or has other drawbacks
- Youd prefer a wider choice of investment options
However, there are some downsides to consider:
- While 401 loans allow you to borrow against your retirement funds, no such option exists with an IRA.
- Transferring company stock can be complicated account, read up on an NUA strategy that could save you a lot of money.)
If these downsides arent deal breakers for you, the next step is figuring out how to roll over your 401 to an IRA.
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Transferring Your 401 To Your Bank Account
You can also skip the IRA and just transfer your 401 savings to a bank account. For example, you might prefer to move funds directly to a checking or savings account with your bank or credit union. Thats typically an option when you stop working, but be aware that moving money to your checking or savings account may be considered a taxable distribution. As a result, you could owe income taxes, additional penalty taxes, and other complications could arise.
IRA first? If you need to spend all of the money soon, transferring from your 401 to a bank account could make sense. But theres another option: Move the funds to an IRA, and then transfer only what you need to your bank account. The transfer to an IRA is generally not a taxable event, and banks often offer IRAs, although the investment options may be limited. If you only need to spend a portion of your savings, you can leave the rest of your retirement money in the IRA, and you only pay taxes on the amount you distribute .
Again, moving funds directly to a checking or savings account typically means you pay 20% mandatory tax withholding. That might be more than you need or want. Most IRAs, even if theyre not at your bank, allow you to establish an electronic link and transfer funds to your bank easily.
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How Long Do I Have To Rollover Really Old 401s
Itâs easy to lose track of 401s youâve held at former employers. At the rate Americans change jobs, itâs possible to have 401s outstanding at multiple employers.
Human resource departments and plan administrators can lose track of 401 accounts of former employers, causing them to sit in the plan untouched for years.
There are no specific time constraints with these plans. However, if the plan were to cash out your old 401, youâll have 60 days from the time they terminated the plan to roll it over to another retirement account.
What If You Have An Existing 401 At Your Previous Employer
If you have a 401 at a previous employer, youll want to consider whether a rollover makes sense for you. You may want to consult with a tax professional to make sure that you are making a decision that is best for your unique circumstances.
As youre thinking about what to do with your old 401, here are some options to consider:
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What Are My 401 Options After Retirement
Generally speaking, retirees with a 401 are left with the following choicesleave your money in the plan until you reach the age of required minimum distributions , convert the account into an individual retirement account , or start cashing out via a lump-sum distribution, installment payments, or purchasing an annuity through a recommended insurer.
How Long Do I Have To Roll Over My 401
You can roll over a 401 at any point after you switch jobs or retire. Bear in mind, though, that the IRS gives you just 60 days after you receive a retirement plan distribution to roll it over to an IRA or another plan. And youre only allowed one rollover per 12-month period from the same IRA.
If you miss the 60-day deadline, the taxable portion of your 401 distribution will be taxed. And if you are under the age of 59½, there will be an additional 10 percent tax penalty.
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Move Your 401 To Your New Employer
If your new employer has a retirement plan, you can ask your former employer to automatically transfer your money to the new 401. Direct transfers may take a few days or weeks, depending on the 401 plan.
You may also opt to receive a check with your 401 balance so that you can deposit it to your new 401. In this case, you have 60 days to deposit the check into the new plan. Any delays past the 60-day deadline attract an income tax and penalty on early withdrawals.
Rollover And Transfer Options
You can roll over funds in your governmental 457 plan to a traditional IRA, 401, 403, or another 457 governmental plan.
The rules for 457 plans at a private tax-exempt organization are much more restrictive. Your funds in such a plan can only be rolled over into another non-governmental 457 plan.
With a 457 plan, the limits are similar: You may not roll over funds from a 457 plan to any other type of tax-deferred fund.
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What Happens If I Cash Out My 401
If you simply cash out your 401 account, you’ll owe income tax on the money. In addition, you’ll generally owe a 10% early withdrawal penalty if you’re under the age of 59½. It is possible to avoid the penalty, however, if you qualify for one of the exceptions that the IRS lists on its website. Those include using the money for qualified education expenses or up to $10,000 to buy a first home.
Direct Rollover Vs Indirect Rollover: Whats The Difference
Okay, once you decide to roll money from one account to another, you have two options on how to do the transfer: a direct rollover or an indirect rollover. Spoiler alert: You always want to do the direct transfer. Heres why.
With a direct rollover, the money in one retirement accountan old 401 you had in a previous job, for exampleis transferred directly to another retirement account, like an IRA. That way, the owner of the account never touches the money, and you wont have to pay any taxes or penalties on the cash being transferred. Once its done, its done!
Indirect rollovers, on the other hand, are a bit more complicatedand needlessly risky. In an indirect rollover, instead of the money going straight into your new account, the cash goes to you first. Heres the problem with that: You have only 60 days to deposit the funds into a new retirement plan. If not, then youll get hit with taxes and penalties.
See why the direct rollover is the only way to go? Theres just no reason to take a chance on an indirect rollover that leaves you open to heavy taxes and penalties. Thats just dumb with a capital D!
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How To Rollover Your 401 To An Ira
As we mentioned, one of the options available when you leave your job is to roll the balance over to an IRA plan. There are two different ways you can do this:
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Direct rollover: The simplest way to roll your 401 balance to an IRA is to have your 401 administrator make a payment directly to your IRA plan. To initiate this type of rollover, simply ask your 401 administrator to send a check to your IRA plan. Your IRA administrator can provide instructions on where to send the check.
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Indirect rollover: If a direct rollover isnt an option, you can use an indirect rollover where your 401 plan administrator sends a check made out to you with the balance of your account. You then have 60 days to deposit that amount into your IRA to avoid being subject to income taxes.
How To Roll Over Your 401 To An Ira
The easiest and safest way to roll over your 401 into an IRA is with a direct rollover from the financial institution that manages your 401 plan to the one that will be holding your IRA. Note there are three key types of rollovers from a 401 to an IRA:
Your plan administrator can guide you through the process, and the financial institution where your money is going will usually be more than happy to assist. In many cases, your plan administrator will give you a check made out to your new IRA custodian for you to deposit there. Thus, open your new IRA first, then contract the plan administrator for of your former employer.
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Q I Retired From My Job On April 3 2020 I Have A 401 With This Employer With A Balance Of Approximately $600000 Should I Rollover The 401 Into An Ira Or Leave It Where It Is Retired
A. Congratulations on your retirement.
There are many reasons why someone may leave their 401 in place after leaving a job.
The perception of lower costs is one of the main reasons.
But theres been a lot of questions surrounding the lack of transparency of 401 plan fees.
Some 401 plan costs are actually quite high, said Matthew DeFelice, a certified financial planner with U.S. Financial Services in Fairfield.
I think its worth looking at the internal fund fees expense ratios on the investments in your 401 and comparing them to what similar investments may cost in an IRA, he said. This will require a bit of research on your part, but its worthwhile to take the time to do it so you know what you are dealing with.
Arguably the best reason for keeping assets in a 401 plan whether thats rolling it into your new employers 401 or keeping your old one applies only if youre planning to retire between ages 55 and 59 ½, DeFelice said.
In general, you must pay a 10% early withdrawal penalty if you take money out of your 401 or IRA before you reach age 59½, DeFelice said.
There is, however, an important exception for 401 plans: Workers who leave their jobs in the calendar year they turn 55 or later can take penalty-free withdrawals from that employers 401 plan, he said.
But if you roll that money into an IRA, youll have to wait until youre 59½ to avoid the penalty unless you qualify for one of a handful of exceptions, he said.
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A Closer Look At Your Available Options
The good news is whatever money thats in your 401 is yours to do with as you like. But when you no longer work for a company, any retirement accounts you have through your former company might need to be moved to your new employer. Or you may need to roll it over or into a brokerage account that you own completely.
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When It’s Time To Withdraw Funds From A 457 It Can Get Complicated
If you’re a state or local government employee, or work for a tax-exempt non-profit, you may be saving for retirement with a 457 plan. This is one of the most complex of the employer-sponsored plans available, and there are several variations. As you get close to retirement, make sure you know the options available to you for withdrawing your money.
