What To Do With Your Old 401 When You Quit And Why It Matters
One common question when leaving a job is what to do with the old retirement plan. Whether you leave involuntarily, quit to start a new job, or see yourself switching jobs several times in the next few years, you need a plan for your former employer’s retirement savings plan. That’s your 401, 457 or 403.
One wrong move can cost a big chunk of your savings, so you need to be ready to take the right steps.
Can You Be Required To Roll Over Your 401
Sometimes you have no choice in the matter. You might be required to roll over your 401 if:
You dont meet a minimum balance requirement. For example, if you have less than $5,000 in your 401, your employer can require you to roll your 401 into a different account.
Your old employer changes 401 providers. Depending on your company, your account may not be rolled over and your existing provider may not continue service. If your account is rolled over, the new provider might have requirements you cant meet, or they might not provide the services you want.
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Rolling Over Your 401 From A Previous Employer
Having your 401 funds rolled over to another retirement account is a great option. Rolling over old 401s to a new retirement account ensures youâll continue growing your retirement fund, and youâll avoid being penalized for an early withdrawal.
Your previous employer can release your 401 in two ways: direct and indirect rollovers.
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Roll Over Your Money To A New 401 Plan If This Option Is Available
If youre starting a new job, moving your retirement savings to your new employers plan could be an option. A new 401 plan may offer benefits similar to those in your former employers plan. Depending on your circumstances, if you roll over your money from your old 401 to a new one, youll be able to keep your retirement savings all in one place. Doing this can make sense if you prefer your new plans features, costs, and investment options.
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- Any earnings accrue tax-deferred.1
- You may be able to borrow against the new 401 account if plan loans are available.
- Under federal law, assets in a 401 are typically protected from claims by creditors.
- You may have access to investment choices, loans, distribution options, and other services and features in your new 401 that are not available in your former employers 401 or an IRA.
- The new 401 may have lower administrative and/or investment fees and expenses than your former employers 401 or an IRA.
- Required minimum distributions may be delayed beyond age 72 if youre still working.
How Long Do I Have To Deposit The Check
You should deposit the check you get right away. Even if the check is made out to your IRA provider , you should try to do it within 60 days of receiving it.
Get a prepaid envelope sent directly to your door with a tracking number! Start a rollover with Capitalize and well send you a prepaid priority mail envelope with detailed instructions to make sure your rollover is transferred successfully. Get started
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What Is The 60
The 60-day rollover rule is applicable to indirect rollovers only and is usually used in the context of taking a short-term loan from your retirement plan. You dont necessarily have to leave a job to attempt an indirect rollover.
Say you withdraw money from your 401. Also imagine that you receive the money directly into your own bank account.
Within 60 days, youll need to deposit the entire amount withdrawn, before taxes, to a new retirement plan to avoid taxation . When you take money out of a retirement plan early, youre subject to a 10% penalty if youre below 59 ½, unless its for a qualified exception.
Due to the nature of indirect rollovers, youre only allowed to complete one per 12-month period. This one-per-12-months rule only applies to indirect rollovers, not to the more traditional direct rollovers as described above.
Note that this does not mean you only have 60 days to roll over your 401 after leaving a job. Many people leave old 401 plans in place for many years before deciding to move them.
The significant takeaway here is that a direct rollover is your best bet for rolling over an old 401, while an indirect rollover is more applicable in the context of taking a short-term loan from your retirement plan one that youre absolutely sure you can pay back!
A quick example:
Say you withdraw $50,000 from your employers 401 plan in an attempt to complete an indirect rollover. 20% of the withdrawal is withheld in the process for federal taxes.
Invest Your Newly Deposited Funds
You’ll 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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Is There A Service Out There Than Can Handle This Process For Me
Yes thats where Capitalize comes in!
Weve made it our mission to make this process easier for everyone. If you choose to do a 401-to-IRA rollover, we can handle the entire process for you. Most of the process can be done online and our rollover experts will guide you through any of the manual parts.
Its 100% free to you .
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.
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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:
I often help clients prepare these requests and do a three-way call with them , making it quick and easy to get things done. But if you prefer, you can probably figure this out on your own.
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:
What to Say
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.
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What If My Check Gets Misplaced Or Lost In The Mail
This unfortunately does happen every once in a while, but dont worry your money hasnt disappeared. If your check doesnt arrive then youll have to call your 401 provider again and ask them to issue a new one. Theyll place a stop on the first one, and nobody will be able to cash the first check since its generally made out to you or your IRA provider and will always stipulate that its for the benefit of or FBO, your name.
STEP 5
How Do I Complete A Rollover
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Rollover To A Traditional Ira
Transferring funds between a traditional 401 and a traditional IRA or between a Roth 401 and a Roth IRA is relatively straightforward. In many cases, you can do a direct rollover, also called a trustee-to-trustee transfer. This involves your 401 provider wiring funds directly to your new IRA provider. Alternatively, your 401 provider may send you a check that you then deposit into your new IRA.
Look out for any taxes your provider may have preemptively deducted. You shouldnt owe any taxes or penalties as long as you deposit money in a tax-advantaged retirement account within 60 days.
Whats The Difference Between A Direct And Indirect Rollover
A direct rollover involves moving money from 401 plan-to-plan or from a 401 to an IRA, and is the recommended way to roll over an old 401. Usually, it happens in one of two ways:
- Youll contact your former employers 401 plan provider and request a check for the entire account balance made out to your new provider . Theyll send a check directly to your new company and deposit it to your new account. No taxes are withheld.
- Youll request a check in the same manner as described above , except youll receive the check directly and will be required to forward it along to your new company yourself. Again, no taxes are withheld.
An indirect rollover is a bit more complex, and can get you into hot water if you dont follow the rules very carefully.
- Youll request a check from your 401 plan, except in this case the money is paid directly to you as an individual. Taxes will be withheld.
- Youll need to deposit the full amount withdrawn, before taxes, new 401 or IRA within 60 days to avoid taxes and penalties.
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Option : Leave Your Money Where It Is
Usually, if your 401 has more than $5,000 in it, most employers will allow you to leave your money where it is. If youve been happy with your investment options and the plan has low fees, this might be a tempting offer. Before you decide, compare your old plan with any retirement plans offered at your new job or with an IRA of your own.
Your new employer-sponsored plan might have more limitations on it than your previous plan or other available options. Maybe there are fewer investment choices/options. Maybe it doesnt have an employer match or higher management fees. So youll want to look closely.
Also consider how often you tend to stay at jobs. If you change jobs every few years, you could end up with a trail of 401 plans at all the different places youve worked. Consolidating might be easier in the long run.
Option : Cashing Out Your 401
While withdrawing your money is an option, in most circumstances, it means those funds will not be there when you need them in retirement. In addition, cashing out your 401 generally means youll have to pay taxes on the withdrawal, and theres typically an additional 10% tax penalty if youre younger than 59½, unless you left your employer in the calendar year you turned 55 or older.
Net unrealized appreciation: special considerations for employer stockIf you own stock in your former employer and that stock has increased in value from your original investment, you may be able to receive special tax treatment on these securities. This is referred to as net unrealized appreciation . If you roll the employer stock into a traditional or Roth IRA or move it to your new employers plan, the ability to use the NUA strategy is lost. NUA rules are complex. If youre considering NUA, we suggest consulting with a tax professional prior to making any decisions on distributions from your existing plan.
Should I roll over my 401?The decision about whether to roll over your 401 is dependent on your individual situation. A financial advisor will work with you to help identify your goals and determine whats important to you. By understanding your investment personality, he or she will be able to advise if rolling over your 401 is the best option for you.
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How The Rollover Is Done Is Important Too
Whether you pick an IRA for your rollover or choose to go with your new employer’s plan, consider a direct rolloverthats when one financial institution sends a check directly to the other financial institution. The check would be made out to the bank or brokerage firm with instructions to roll the money into your IRA or 401.
The alternative, having a check made payable to you, is not a good option in this case. If the check is made payable directly to you, your employer is required by the IRS to withhold 20% for taxes. As if that wouldn’t be bad enoughyou only have 60 days from the time of a withdrawal to put the money back into a tax-advantaged account like a 401 or IRA. That means if you want the full value of your former account to stay in the tax-advantaged confines of a retirement account, you’d have to come up with the 20% that was withheld and put it into your new account.
If you’re not able to make up the 20%, not only will you lose the potential tax-free or tax-deferred growth on that money but you may also owe a 10% penalty if you’re under age 59½ because the IRS would consider the tax withholding an early withdrawal from your account. So, to make a long story short, do pay attention to the details when rolling over your 401.
Traditional Vs Roth: Which Type Of Ira Should I Roll My 401 Into
Now, the type of rollover IRA you transfer your money into depends on what type of 401 youre rolling over.
If you had a traditional 401, you can transfer the money into a traditional IRA without having to pay any taxes on it . Likewise, if you had a Roth 401, you could roll the money into a Roth IRA completely tax-free. Easy, right? Traditional to traditional, tax-free. Roth to Roth, also tax-free.
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