Please Do Not Do An Indirect Rollover
You do NOT want to have the check made payable to you. It may seem counterintuitive, as it is your money. However, if the check is made payable to you, the IRS could treat this as a distribution to you.
Your employer is required to withhold 20% for taxes automatically. On top of that, you have 60 days to put the money back into IRA or 401. So, if you want your account to maintain at least the same level of value, you would need to come up with that 20% withholding. The 20% is withheld for taxes and will NOT roll over.
If you cannot come up with that 20% withholding, the IRS will count that as a withdrawal, which might carry an additional 10% penalty. Avoid this potentially costly and annoying mistake by paying attention to the details and conducting a direct rollover.
As you can see, an indirect rollover is potentially expensive and not helpful to you. Please avoid doing it. Even if you get that 20% withholding back, it takes forever, and you miss out on participating in the market.
Source: Internal Revenue Service
Roll It Into A New 401 Plan
The pros: Assuming you like the new plans costs, features, and investment choices, this can be a good option. Your savings have the potential for growth that is tax-deferred, and RMDs may be delayed beyond age 72 if you continue to work at the company sponsoring the plan.
The cons: Youll need to liquidate your current 401 investments and reinvest them in your new 401 plans investment offerings. The money will be subject to your new plans withdrawal rules, so you may not be able to withdraw it until you leave your new employer.
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Making The Right Decision For You
A rollover is often seen and planned for as a one-time event. Request the rollover to a new account, invest the money once deposited, and move on with your to-do list. However, any decision regarding a prior employer 401 can impact the fees you pay on your investments, the level of control you have over your accounts, your overall investment strategy, and even your ability to effectively use a backdoor Roth IRA strategy. With so much on the line, its critical to make the right call.
With the right strategy in place, youll make a more informed decision and keep your money working hard for you for years to come.
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Transfer The Money To Your New Employers 401
If your new employers plan allows it, you may transfer your old 401 savings into your new 401 plan.
In Lesters view, rolling your old account into your new employers 401 plan should be your default unless theres a good reason not to.
But youll only want to do that if the new plan offers solid, low-cost investments or at the very least, low-cost target date funds.
The benefit of consolidating your retirement savings into one employer-sponsored plan is that it will be easier for you to track and manage the money.
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You Can Still Roll Over A Loan Offset From A 401
Although you cant roll over an unpaid loan balance to another 401 or IRA and continue to make regular payments on it, you can avoid taxation on the loan offset that results when you take a distribution without repaying your outstanding loan balance.
When your prior employer offsets the outstanding loan balance you owe, you will be required to take this outstanding amount as taxable income for the year. But, if youre able to open an IRA , you can indirectly rollover the amount of the loan offset to your account, by depositing the outstanding loan amount in cash to your IRA account as an indirect rollover. If you do this within the 60-day period following your loan offset, your outstanding loan amount will not be taxable to you at year-end. If you qualify for a QPLO, youll have a longer period of time to make a contribution to an IRA.
To help avoid any issues, we think its best to pay off an outstanding loan before requesting a termination distribution if you can. If you do this, you can roll over the entire balance to a 401 plan or IRA without involving the indirect rollover process.
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Con: Limited Creditor Protection
The Federal Employment Retirement Income Security Act precludes third parties from accessing assets in your 401 to satisfy their claims if they win a lawsuit against you. IRAs, on the other hand, do not have the same amount of protection as 401 plans. To settle their claims, a creditor may have access to your IRA funds up to a specified level. Some IRAs provide creditor protection up to a certain amount, although these limits vary by state.
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Do I Have A Deadline To Take Money Out Of My Old 401
When you leave a job, you arent forced to decide what to do with your 401 immediately.
The money already in your 401 is yours, so you can usually leave it as long as you want or roll it into an IRA at any time.
However, there are a few exceptions:
- If you contributed less than $5,000 to your 401, your employer is legally allowed to tell you to take the money and move it elsewhere .
- Contributions of $1,000 to $5,000 are subject to involuntary cash-outs. Thats when your former employer moves the full amount into an IRA.
- If you contributed less than $1,000, your former company can mail you a check for the full amount. You can deposit this amount into another retirement account within 60 days to avoid tax penalties.
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Get In Touch With The Previous 401 Plan Administrator To Rollover Funds
After getting relevant information from your current plan administrator, get in touch with the previous 401 plan administrator to roll over funds. Request a distribution. This may be through a direct rolloverâwith a check from the current retirement custodian going directly to the new retirement custodian. An indirect rollover is where the check goes to the employee, who must rollover within 60 days.
Should I Transfer My 401 To My New Job
In most cases, transferring your 401 to a new job makes sense. Its typically better to have your 401 funds in one place if the variables align properly plan at your new job, and youd like easier control over the funds).
But this is not to say there arent many instances where youd be better off leaving it as is or even looking into an IRA rollover. The only one that can truly determine if you should roll over your 401 is you if youre having trouble making a decision, you can consult with a fee-only financial planner to discuss your particular situation.
Regardless if you decide to transfer your 401 to a new job, take time to understand the pros, cons, and potential tax consequences of any decision you make surrounding your old 401.
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What Will I Do With My 401
Actually, I havent decided yet. My goal for this month is to investigate my new 401 plan and compare it to my old companys 401 plan and determine the best option for me. Personally, I think I will either roll it into my new companys plan, or I will roll it over into an IRA. I prefer to limit the total number of accounts I have because it makes it easier to balance my portfolio and keep track of everything.
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How To Roll Over Your 401 To Your New Employer
Rollovers arent always the easiest things to accomplish which is why so many accounts are left behind. To properly complete a rollover, follow these steps:
Once the rollover is complete, it becomes part of your new 401 balance, and you can manage it and invest it as one account.
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Leave It In Your Current 401 Plan
The pros: If your former employer allows it, you can leave your money where it is. Your savings have the potential for growth that is tax-deferred, you’ll pay no taxes until you start making withdrawals, and you’ll retain the right to roll over or withdraw the funds at any point in the future.
The cons: You’ll no longer be able to contribute to the plan, and the plan provider may charge additional fees because you’re no longer an employee. Managing multiple tax-deferred accounts can also prove complicated. The IRS mandates required minimum distributions annually from all such accounts beginning at age 72 . Fail to calculate the correct amount across multiple accounts, and the IRS will slap you with a 50% penalty on the shortfall.
Rolling Over Your 401 To An Ira
Transferring to your new 401 is not your only option. You could also move the money to an Individual Retirement Account , a retirement plan you open and manage outside of work.
- If you already own an IRA, you could transfer your old 401 funds into your existing account.
- If you don’t have an IRA, you can open one through a financial institution: You request rollover forms, fill them out, and list your IRA account information.
Keep in mind that if you move money from a 401 into an IRA, you can’t withdraw funds penalty-free if you leave your employer during or after age 55, same with a 401, but must instead wait until age 59 1/2 to avoid the 10 percent penalty tax.
If your new job doesn’t offer a retirement plan, an IRA would allow you to move your money and continue saving for retirement. Even if your new job does offer a 401, it could be worth comparing that plan against an IRA. If the 401’s account fees are high or you don’t like its investment options and your employer doesn’t offer a matching contribution, it may make more sense to use an IRA instead.
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Plan Options When You Leave A Job
If you have an employer-sponsored 401, you will likely be faced with four options when you leave your job.
- Stay in the existing employers plan
- Move the money to a new employers plan
- Move the money to a self-directed retirement account
Before deciding, here are a few things to consider with each option.
Rollover The Money Into An Ira
If you moved to a higher-paying job, you should consider a rollover IRA to get greater control over your investments. A rollover IRA allows you to combine all your old 401s so that you have a single location for your retirement money.
Unlike a 401 where you are the participant, an IRA gives you full ownership of your retirement savings, and you can make decisions on your portfolio composition, and how much to invest in each type of security. You can also choose to convert your IRA account into a Roth IRA account if you think that your retirement income will be higher than your current income.
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You Can Still Roll Over Cash Outs From A 401
If you do receive a cash out from your previous 401, it may be wise not to spend that check. For example, if you spend a $900 cash out instead of rolling it over into an account earning 8% tax-deferred earnings, your retirement fund could miss out on more than $8,000 in growth after 30 years*. The bigger your cash out, the higher your opportunity cost may be.
If youre able to open an IRA that accepts the cash out check within 60 days from your last day of employmentconsider taking advantage of an indirect rollover to recoup withholdings and avoid paying penalties.
Youll have to deposit the cash out check as an indirect rollover. Any portion of the gross amount of the cash out that you do not roll into an IRA will be considered taxable income to you. Therefore, you should also deposit any federal and state withholdings originally taken from your cash out distribution and roll that into your IRA as well. If you do this within the 60-day period following your cash out distribution, the rollover amount will not be taxable to you and the withholding on the distribution will be used towards any taxes you owe to the IRS when you file your next tax return. If you do not owe taxes, the withholdings will be returned to you via a tax refund.
To help avoid any issues, we think its smart to review your distribution options early after you terminate employment, and request a rollover distribution to a qualified plan or IRA of your choice before your employer forces you to take one.
Access To A Roth Option
An increasing number of employers are offering a Roth 401 option in addition to the traditional 401 option. With a Roth 401, the money you contribute is after-taxit doesnt minimize your taxable income. But when you take distributions in retirement, you wont have to pay taxes on the withdrawal amount. As long as the account has been open for five years and youre over 59 ½, you can receive tax-free distributions.
A Roth 401 option can be appealing if you feel your income in retirement will be higher than your current income. If your new employer offers this benefit and you think it will be advantageous to your financial situation, then rolling over your 401 to a Roth 401 plan may make sense.
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Questions To Ask About Your New Employers Plan
Employers typically include 401 plan information in a new hire package. You should get a letter outlining the specifics of your companys plan, and maybe a brochure with investment options and other details. Most 401 providers have websites that will walk you through an introduction. Take a few minutes to skim and read the details and get to know a little bit about the plan.
Look for answers to the following questions, when reviewing the plan details:
Is there an employer matching program? More than 95% of large U.S. companies match the contributions that employees make to a 401. The average employer contribution amount is 4.5% of salary some companies contribute up to 6%. Think of it as a 6%, tax-free bonus and you get why an employer match is not a benefit to be missed.
Whats the vesting schedule? Many employers offer a vested match, which means that although the company is contributing up to six percent of your match, your access to that money is given on a timeline. After year one or two, you get 25% of the money, then 50%, until you receive the full 100% match after five or more years.
Getting started on a vesting schedule is one of the reasons its important to sign up for the 401 as soon as you can. Youll optimize the funds the company matches if you enroll at the earliest possible date.
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Are There Any Downsides To Rolling Over My 401
Yeah, it can come with a couple of cons, depending on your new employers 401 provider. Like worse investment options or higher fees. Though you will be able to choose your investments, the plan provider decides which ones to offer you. And you may have to pay a higher rate on your investments. Even if it initially sounds like a small difference, it can add up over time.
Before you start weighing your options, heres some help with the language of retirement.
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Option : Roll It Into Your New 401
If your new employer offers a 401, you can possibly roll your old account into the new one. You may be required to be with the company for a certain amount of time before youre eligible to participate in their plan.
You can choose to do a Direct Rollover, whereby the administrator of your old plan transfers your account balance directly into the new plan. This only requires some paperwork.
Or, you can choose an Indirect Rollover. With this option, 20% of your account balance is withheld by the IRS as federal income tax in addition to any applicable state taxes. The balance of your old account is given to you as a check to deposit into your new 401 within 60 days. There is one catch, though. Youll need to deposit the entire amount of your old account into your new account, even the amount withheld for taxes. That means using personal cash to cover the difference and waiting until tax season to be reimbursed by the government.
