Advantages And Disadvantages Of Doing A 401 Rollover
Weve already discussed some of the benefits of doing a 401 rollover from an old employer plan to a new one. In this section, lets focus on the advantages and disadvantages of doing a 401 rollover into an IRA.
Youre an experienced investor, and would prefer to manage your own retirement assets.
The benefits and costs of using a robo-advisor to manage your money are better than those of the current plan.
Youre not happy with the investment options in your current plan.
You have several 401 plans from previous employers, and you want to consolidate them into a single IRA.
Your new employer either doesnt permit a rollover of an old 401 plan, or doesnt provide the investment options youre looking for.
Youre satisfied with the current plan and the returns its providing.
You have an immediate need for the funds, due to disability, medical costs, or other distributions that will exempt you from the 10% early distribution penalty.
Find Out Where Your Money Is Held
The first step is to figure out exactly where the funds in your 401 account are currently being held. To find out, look at your 401 statement, either online or on a paper statement if you receive them in the mail. On the statement, youll see a company name, such as Fidelity or Vanguard. This is the name of the company where your money is actually being held, called the custodian.
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What To Consider When Choosing A Broker
If youre planning to roll over your 401 into an IRA, youll likely be most concerned with a broker that can do the following things best. Most brokers do offer an IRA, but some popular ones do not, but the brokers above all offer IRAs. We also considered the following factors when selecting the top places for your 401 rollover.
- Price: Trading commissions for stocks and ETFs have fallen to $0 at most online brokers, and thats great for investors. But there are other costs, too, perhaps most notably account fees, such as fees for transferring out of your account.
- No-transaction-fee mutual funds: The brokers in the list above offer thousands of mutual funds without a transaction fee. If youre rolling over your 401 and you like the mutual funds you have already, these brokers may allow you to buy and sell the same one without a fee.
- Investing strategy: While a 401 may limit your investing options to a pre-selected group of mutual funds, an IRA gives you the ability to invest in almost anything trading in the market. So we considered how each broker might fit an investors needs.
What If I Have Employer Stock In My Employer
You can choose to roll company stock into an IRA or a taxable brokerage account. If you decide to roll the stock to an IRA, its full value will be taxed as income at your regular rate if you move the stock to a taxable brokerage account, you might be able to save money by paying capital gains taxes on the difference between the stocks value and the price you paid for it. There are tax benefits to each, so consult your tax advisor and ask about the net unrealized appreciation strategy.
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Invest Your Newly Deposited Funds
Youll have to choose investments in your new IRA so your money can grow. Make sure to maintain an appropriate asset allocation given your age, and consider your risk tolerance.
Finally, when your new IRA has been opened, be sure to read up on common IRA mistakes to avoid, such as forgetting required minimum distributions, not designating beneficiaries, and trading too often in the account.
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Rolling Over Your 401 To A Vanguard Ira Is Simple If You Know How
Thanks to its vast array of ultra-low-cost index mutual funds and exchange-traded funds , Vanguard has become one of the largest investment companies in the world. It’s also popular for those who are looking to roll over retirement savings from a workplace 401 plan to an individual retirement account . Many investment companies have worked to keep the rollover process as simple as possible to attract assets, and Vanguard is no exception.
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Reasons You May Want To Wait To Roll Over Your 401
- Temporary ban on contributions. Some plan sponsors impose a temporary ban on further 401 contributions for employees who withdraw funds before leaving the company. You’ll want to determine if the gap in contributions will significantly impact your retirement savings.
- Early retirement. Most 401s allow penalty-free withdrawals after age 55 for early retirees. With an IRA, you must wait until 59 ½ to avoid paying a 10% penalty.
- Increased fees. IRA investors may pay more fees than they would in employer-sponsored plans. One reason: The range of more sophisticated investment options you may choose can be more expensive than 401 investments. Your advisor can help identify what extra cost a rollover may incur and if the benefits of the rollover justify those additional costs.
- Can take loans out. Your 401 may permit you to take out a loan from the account, but this is typically only for active employees. And you may have to pay in full any outstanding loan balances when you leave the company. You cannot take loans from IRAs.
Rollover To A New Employer Plan
Often, consolidation of your retirement plans is advantageous you will have fewer accounts to keep track of, and you can streamline the process of directing your investments. If you have new place of employment that offers a 401 retirement plan, you should first confirm that the new plan will accept incoming rollovers. If the new plan accepts incoming rollovers, you will still want to confirm several important items prior to rolling your money over:
Determine that the investment options are suitable to your investment needs
Confirm the new plans costs and how they compare to your previous plans costs
Once these items have been looked into/confirmed, you can request a distribution from your previous employers plan and notify your new plan of this incoming rollover. Special note, you will want to make sure that the money transfers directly from your prior employer plan to your new employer plan . Otherwise, you risk the rollover being deemed a distribution and incurring adverse tax consequences.
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The following information will be helpful when working with your solo 401k provider to process the non-taxable IRA direct-rollover.
NOTE: If you use My Solo 401k Financial as your solo 401k plan provider, they will fill out the Vanguard IRA brokerage transfer-out form for you.
Contact Your Current 401 Provider And New Ira Provider
Ideally, you want a direct rollover, in which your old 401 plan administrator transfers your savings directly to your new IRA account. This helps you avoid accidentally incurring taxes or penalties. However, not every custodian will do a direct rollover.
In many cases, youll end up with a check that you need to pass on to your new account provider, Henderson says. Open your new IRA before starting the rollover so you can tell the old provider how to make out the check.
The goal, Henderson says, is to avoid having to ever put the money into your personal bank account.
You only have 60 days to complete the transaction to avoid it being a taxable event, and its best to have everything set up before getting that check, Henderson says.
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What To Look For In A Solo 401k
Going through the process of shopping around for a solo 401k provider, I’ve learned a lot about what to look for. There are a lot of options and nuances that you should look for when shopping for a 401k. Many of the “free” providers offer simple generic plans, and if those don’t work for you, you can have a third party provider create a custom 401k plan for your business, which you can then take to a brokerage.
Whoa, that sounds confusing, and it can be. So let’s look at the major options that you need to consider when selecting a solo 401k provider.
- Does the 401k provider offer both Roth and Traditional contributions?
- Does the 401k provider offer after-tax contributions to do a mega backdoor Roth IRA.
- Does the 401k provider offer loans from the plan?
- What types of investment options are allowed in the plan?
- Does the provider allow rollovers into the plan and rollovers out of the plan?
- The costs to maintain the plan
- The costs to invest within the plan
Based on your wants and needs, there are a lot of things to compare when shopping for a solo 401k provider. Let’s compare some of the main firms that offer solo 401ks. We’re going to start with the 5 major firms that provide Prototype Plans. These are the “free” plans that the companies advertise.
Contact Your 401 Provider
Youre making great progress. You know where your 401 is and you have an IRA at Vanguard to transfer your money into. The next step is to initiate your rollover by contacting your 401 provider.
Often, the easiest way to do this is by phone. Your 401 providers phone number should be visible on an old account statement.
In order for your call to go smoothly, follow these tips:
Then place the call. Be prepared for a little hold time but in our experience the entire call should take no longer than 30 minutes.
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Rolling Over Your Old 401 To A New Employer
Many companies offer 401 plans, so people often end up having multiple 401s over their years in the workforce. If youd rather keep your funds in a single 401 or dont want to open an IRA, you might have the option of transferring assets from your old 401 to your new one at your current job. If not, youll need to keep an eye on how each is performing individually.
The process for this is as simple as talking to both your current and past plan providers to make sure they will both accept a transfer of assets. While the providers can offer more specific instructions, youll likely use one of the methods above to complete the rollover.
Note that not all plan providers will accept employees past 401 funds as a rollover. This is because they may not be willing to add more assets to the plan, which could overwhelm it.
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How To Transfer Your Plan To Vanguard
You can follow these steps to get started.
Gather your information
Hereâs what youâll need to prepare for your transfer:
- A plan statement dated within the past 90 days from the company that currently holds your account.
- The plan number and dollar amount currently invested in the plan.
- The type of plan you want to transfer ).
- Your Vanguard account number .
When youre ready to get started, give us a call at 800-992-7188.
- Well guide you through the process to ensure its as seamless as possible.
- A qualified representative will let you know which documents are required to complete the transfer and answer any questions you have.
Track your transfer
- Once we receive your request, well initiate the transfer and send you an email that explains how you can track the status of your transfer online.
- Once your transfer is complete, well send you an email confirmation.
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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.
What You Need To Know About 401 Rollovers
Streamlining your retirement accounts? Think through the key variables first.
A version of this article was published in December 2010.
Question: Streamlining my financial accounts is on my to-do list, and I’d like to roll over a 401 into an IRA. But I have a few questions.
First, can I do a partial rollover–that is, roll most of my money into an IRA but leave some behind in the 401? includes a stable-value fund, and these aren’t available via IRAs.)
Second, can I roll the money into accounts at more than one provider? I have accounts at Vanguard and E-Trade, and I’d like to split my old 401 assets between the two.
Finally, if I decide to do a rollover, can I roll my money directly into a Roth IRA, or do I have to roll it into a traditional IRA first?
Answer: First, kudos to you for taking steps to streamline the number of accounts that you hold. Doing so will give you fewer moving parts to monitor on an ongoing basis–a valuable benefit.
And by rolling over your old 401 into an IRA, you may also be able to reduce the amount of fees you pay on an ongoing basis and improve your investment performance. Many 401 plans contain extra layers of fees, and the individual investment options may be costly and/or subpar. By investing in an IRA, by contrast, you’ll be able to select among best-of-breed investment options, and you won’t pay any additional layers of administrative costs.
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