Finish Any Last Transfer Steps
Chances are that by this stage youre done, and your 401 provider has initiated the process of rolling over your 401 into your new Fidelity IRA. If so, congrats on getting to the finish line!
But there can sometimes be a small extra step at this stage. Thats because some 401 providers will only distribute your 401 funds to you, not to another institution. If thats the case then theyll send a check with your money to your mailing address. Its then up to you to deposit the check to your Fidelity account. Fidelity offers a few methods for depositing a check:
The 10% Early Distribution Penalty
Ive mentioned this penalty a couple of times, so lets discuss it in some detail. Under IRS rules, retirement funds are eligible for distribution beginning at age 59 ½. If you take distributions before reaching that age, which can certainly happen in the case of a distribution or an unsuccessfully completed rollover, youll pay a penalty equal to 10% of the amount of the distribution, over and above the ordinary income tax owed.
But there are IRS exceptions to the early distribution penalty. It can be waived under any of the following circumstances:
- Automatic enrollment permissive withdrawals from a plan with auto enrollment features
- Death of the plan owner
- Disability total and permanent disability of the participant/IRA owner
- Medical amount of unreimbursed medical expenses
- Military certain distributions to qualified military reservists called to active duty
Unless you qualify for one of these penalty exemptions, you should avoid taking direct distribution of your 401 plan funds. Also remember that the exceptions apply only to the 10% penalty. You will still owe ordinary income tax on the amount distributed. Taxwise, a 401 rollover is by far your best strategy.
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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.
- By moving retirement funds from a 401 plan to an IRA, youll be giving up certain protections 401 plans provide from creditors and lawsuits.
- 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.
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You Might Be Missing Out On Better Investments
401 accounts grow at different rates depending on which assets you invest in. If the retirement savings plan at your new companyor an individual retirement plan offers a selection of stocks and bonds that better aligns with your financial goals, it might be time to initiate a rollover.
The money thats sitting in your old 401 could potentially grow at a faster rate if you roll it over into a new plan or into an IRAits certainly worth investigating the growth rates of each. Keep in mind that investors can lose money when investing, too, so it always makes sense to consider your personal risk tolerance when deciding how to invest your retirement accounts.
What Are Your Choices For A Rollover
In general, once you leave a job you have three choices for how to deal with your employer-sponsored retirement plan:
- Leave it with your old employers 401 plan: This approach requires the least amount of work, but may require you to have a minimum amount if you plan to maintain the account there.
- Roll it over into your new employers 401 plan: This approach will require you to file some paperwork, but youll have all your 401 money in one place. This choice can make sense if you like your new employers plan.
- Roll it over into an IRA: This move will require you to file some paperwork, but then youll have the complete freedom to invest the money as you see fit. If you liked the investment options you held in a previous plan, you may still be able to access those via an IRA.
, thats another option for a rollover. But this option is not typical for most individuals.)
If you roll over your 401 into an IRA, youll also want to consider the kind of rollover you need.
- With a Roth 401, youll likely be more interested in a Roth IRA, so that you can maintain the substantial advantages of that plan.
- If you have a traditional 401, then youll probably opt for a traditional IRA.
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Set Up Your Rollover Account
In the event that your funds arent in the new retirement account within 60 days of them being pulled from the old one, its treated as a withdrawal for tax purposes and youll owe a hefty penalty. As such, you should set up your rollover account in advance so that you can send your savings there directly.
You will also get the benefit of the new company managing your account helping you through the process. These companies are competing for your business, so they should be more than willing to provide you with ample support and direction in the process and might even have some additional perks offered to entice customers.
Of course, if youve been happy with Prudential, you can simply open a rollover account with it and keep your money under its management.
My Experience Rolling Over To Vanguard
Like many, I have been with several employers since I finished school and started in the workforce. And because I have always been pretty good about contributing to my retirement accounts, at one point I had a Roth IRA, two 401ks, a 457b and my own individual stock account. Trying to manage so many accounts was daunting, so I ended up doing what a lot of us do ignoring them and just letting things sit. While this isnt terrible it goes against the idea of rebalancing and diversifying your portfolio. So, after reading my brothers blog for the last year, I was finally motivated to try to consolidate the accounts so I could take a more active role in managing my portfolio.
I chose Vanguard basically because I had heard a lot of good things about their no/low load funds and good performance. I started by calling the number on their Personal Investors website, quickly got through to a live person and explained that I wanted to rollover my IRA from a former employer to Vanguard. I was transferred to a concierge transfer specialist who then walked me through the process of creating an account online, which took about 5 minutes. He also verified that I wanted to do a rollover IRA and asked what type of investments I wanted to place the money in once it reached Vanguard. I opted for a money market holding fund until I could do more research on their offerings.
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How To Roll Over Your 401 To A New Employer
If youve ever forgotten to roll over your old 401 to your new employer, youre not alone. A recent study found that as of May of 2021, a whopping $1.35 trillion in assets were forgotten in old 401 plans left behind by employees at their former employers. These accounts, totaling 24.3 million forgotten accounts, have the potential to cost an individual almost $700,000 in lost retirement income savings over the course of a lifetime according to the same study.
The administrative logistics of rolling a 401 can understandably keep people from consolidating old accounts to one, but following a few basic steps makes it easier.
Contact Your Current Plan Administrator And New Plan Administrator
The easiest 401 rollover option is to get your old plan administrator to transfer your balance directly to your new account. This is called a direct 401 rollover, and it frees you from having to worry about tax consequences or early withdrawal penalties.
Speak with your new plan provider about getting an account number, then provide the information to your current 401 administrator. Theyll take care of the rest.
Be aware that not every plan administrator will perform a direct 401 rollover. In this case, the plan administrator cuts you a check for the balance, and its up to you to send the funds to your new 401 plan provider. You have just 60 days to redeposit the balance in your new plan. Otherwise its treated as an early withdrawal that incurs a penalty and income tax liabilities.
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Pros And Cons: 401 Vs Ira
Is There Any Portion Of A Distribution Thats Tax
Yes, if the distribution includes after-tax contributions or Roth contributions. Non-Roth after-tax contributions can be distributed tax-free, but earnings are taxable. Qualified distributions from Roth 401 or Roth 403 accounts are tax-free. However, the earnings portion of nonqualified Roth distributions is taxable.
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How We Can Help
If you have a 401 and are exploring what options make the most sense for you, we invite you to meet with one of our financial advisors to discuss your situation. He or she will take the time to explain the options available to you, answer any questions you may have and together you can determine whats best for you.
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Can I Transfer The American Funds Shares Held In My Retirement Plan Account Into An Ira
It depends on your retirement plan. Check your plans SPD to see when youre allowed to take a distribution. If you qualify to take a distribution , you can request a direct rollover to an IRA.
Rollovers from retirement plans to IRAs are tax-reportable, however, direct rollovers are not taxable if completed as direct rollovers.
To determine if you may continue to hold your American Fund shares in the same share class, speak with your financial professional or you may call us at .
To What Kinds Of Fidelity Accounts Can I Transfer Assets From Another Institution
You can transfer assets from another institution to most kinds of Fidelity accounts. However, the account you are transferring assets from must be the same type of account to which you are transferring funds. For example, you can transfer assets from a Roth IRA to another Roth IRA with the same owner, but not from a non-retirement account to an IRA.
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Are There Exceptions To The 10% Early Withdrawal Penalty
If youre under 59½ when you cash out of your plan, you may also be subject to a 10% early withdrawal penalty. Certain exceptions include:
- If youre 55 or older when you leave your job.
- Distributions due to death, disability and certain medical expenses.
- You take the distribution as part of substantially equal payments over your lifetime.
Ask your financial professional for more information about these and other exceptions.
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What Kind Of Plan Is It And Have You Already Started Withdrawing From It
If the client has already started withdrawing from the plan, she cannot transfer it into an RRSP, says Power. She adds 401s that have been rolled over into annuities cannot be transferred.
There are considerations for each plan. For 401s, only the employee-contributed amounts can be transferred to an RRSP without using up RRSP room. Any employer contributions can still be transferred, but the client needs commensurate RRSP room. To get around that, We always recommend converting from a 401 to an IRA first, says Altro. Thats not a taxable event, he adds, and it allows both portions to be transferred to an RRSP without using up contribution room.
Another reason to convert is if a client was a Canadian resident while she participated in the 401 planfor instance, a cross-border commuter, says Wong. Thats because shes ineligible for a direct 401 to RRSP transfer.
For IRA-to-RRSP transfers, Wong says that the transferred value cannot include amounts contributed from someone other than the taxpayer or taxpayers spouse, such as employer pension amounts.
With 401s, the employer plan administrator is responsible for keeping track of the after-tax and pre-tax contributions. With IRAs s are rolled over to IRAs), that tracking responsibility shifts to the individual, says Altro. Advisors must ask clients if they have any after-tax contributions in their U.S. plans.
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Choose Which Type Of Ira Account To Open
A 401 rollover to an IRA may give you more investment options and lower fees than your old 401 had.
If you do a rollover to a Roth IRA, youll owe taxes on the rolled amount.
If you do a rollover to a traditional IRA, the taxes are deferred.
If you do a rollover from a Roth 401, you wont incur taxes if you roll to a Roth IRA.
After you leave your job, there are several options for your 401. You may be able to leave your account where it is. Alternatively, you may roll over the money from the old 401 into a new account with your new employer, or roll it into an individual retirement account , but you must first see when you are eligible to participate in the new plan. You can also take some or all of the money out, but there are serious tax consequences to that.
Make sure to understand the particulars of the options available to you before deciding which route to take.
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