Is It A Good Idea To Rollover 401k

Definition Of A 401k Retirement Account

In 1978, as part of the Revenue Act, Congress enacted a law allowing individuals to hold a retirement account outside their employment. These accounts are listed under Section 401k in the Internal Revenue Code. This was the first time employees could save for retirement outside of a pension plan.

Many employers encourage their employees to invest in a 401k plan and will offer matching contributions. Most of the time, the matching amount is a percentage of the employee’s contribution.

Contributions to a 401k account are pre-tax contributions that help you save more for retirement. Taxes are paid when you begin to make withdrawals in retirement.

There are limits to how much you can contribute to your 401k each year. Each year Congress sets a new limit, so it is important to check yearly.

Key Options For A 401 Rollover

As youre considering where to roll over your 401, youll want to consider the advantages of each account type, the drawbacks, your own financial situation and the tax implications.

Depending on how much you have invested in your plan, you may have a limited time to make this decision, and in some cases your former company can make the decision for you:

• If you have less than $1,000, your ex-employer can just cash you out. You can still roll over the money into another account, but you typically must do so within 60 days.
• If you have between $1,000 and $5,000, your ex-employer can move the money into an IRA of its choice. If you dont like that IRA, you can always move it.
• If you have more than $5,000 in your 401, your company must await your instructions on how to proceed. You could continue to leave your money in your old 401.

The specific rules vary from employer to employer, and the rules that apply to your old 401 can be found in the plans documents. So check there first, if youre unsure how to proceed.

How Can I Find Old 401 Accounts

If you forget about an old 401 altogether, or If you believe you have a 401 that has been lost, you can take steps to find it. If your old employer is still in business, you can contact them directly for any information. You can also try reaching out to the plan holder. Another option includes using your states database of unclaimed 401 plans.

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Should I Combine My 401 Accounts

If youre reading this article, you might be at the point during your career where youve got at least one 401 account that youre no longer contributing to. If you are wondering whether to combine your 401 accounts, here are a few of your options:

1. Rolling the 401 account into your active 401.

2. Rolling the 401 account into a Traditional IRA at an institution of your choosing.

3. Doing nothing, and leaving the account as-is.

Everyones financial situation is different, so consider the pros and cons of each option when trying to decide what is best for you. When weighing your options, here are some things you might consider:

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Drawbacks Of Keeping Your 401 With A Former Employer

There are potential drawbacks to this strategy, which may lead you to roll over your account into a new plan.

Multiple accounts to manage: Keeping your 401 with your former company means youll have more than one retirement account to track. For some investors, that may be one too many accounts to juggle.

Contributions end: While the money in your old 401 will continue to grow tax-deferred, you will no longer be able to contribute to the account.

Communication: You may be out of the loop about important updates concerning your account if information about your former employers plan is distributed via company email.

Higher fees: Its possible that fees and expenses attached to your former employers plan are higher than what is offered by your new company. Remember to check the fee disclosure notice of any plan that youre in or thinking of joining.

What Is A Direct Rollover

A direct rollover is a distribution of assets from one plan into another. For instance, you may request a rollover of the investments in your traditional 401 into a traditional IRA. The benefit of this approach is it allows you to maintain your investments without creating a taxable event. Plus, you can roll multiple old 401 plans into a rollover IRA, making them easier to manage.

As noted previously, while it is possible to move investments directly from a traditional 401 to a Roth IRA, there will be tax implications because the flow of money into the Roth IRA is considered a contribution. Hence, this option may not be worth it unless the benefits outweigh the costs.

Its also worth noting that direct rollovers have a deadline. If you opt for a direct rollover, the process must be completed within 60 days to avoid the possibility of penalties. This means the entire process of moving the funds from the old account into the new account must happen within 60 days.

If the funds have been moved out of the first plan but are not yet deposited into the new account, you may be hit with penalties. Hence, if you prefer this option, be sure you can move the funds quickly into the new account when the time comes. Also, you may want to ask your old plan provider how long it takes for them to move the money out so you know when it will be your turn to act.

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What Is A 401 Rollover

A 401 rollover is when you take funds out of your 401 account and move them into another tax-advantaged retirement account. You can roll a 401 over into an individual retirement account or into another 401, most commonly when you get a new job with a new retirement plan. Either way, you should understand the best 401 rollover options for your particular situation.

Will This Catch On

CNBC conducted an online reader survey, and a resounding 92% of respondents indicated that they would not consider rolling their 401 money into their employers pension plan.

This is not all that surprising, considering how traditionally popular lump-sum distribution options from pension plans have been. Many retirees seem to prefer having more control over their retirement nest egg via a rollover into an individual retirement account account. This arrangement offers flexibility in the amount withdrawn and allows options in terms of leaving the money to heirs via an inherited IRA, for example.

Another factor might be that the PBGC is not nearly as well known as the Federal Deposit Insurance Corporation , which performs a similar function by insuring bank deposits.

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Option : Rolling Over Into Your Active 401

Your first option with the 401 you no longer contribute to is to roll the money into your active 401 account with your current employer. This is a good option to consider if you want to have all your tax-deferred dollars in one place.

Pros:

1. A single place for all tax-deferred money

2. Consolidating your investment strategy

The act of consolidation isnt just ideal for cosmetic reasons. It may make it easier to keep track of your money and manage a cohesive investment strategy. It can be challenging to manage a bunch of different retirement accounts.

Cons:

1. Limited investing options

Sometimes, 401 plans have limited investing options. If you like the options that you have available, this may not be a hangup for you. By looking at the investment option information provided by your plan, you should be able to make an informed decision about how you want to direct your investment.

Before moving more money into an active 401 plan, you may want to investigate both the fees charged by the account and the investing options.

2. Additional fees

Sometimes, 401 accounts have additional fees on both the accounts and investments themselves.. Check to see if fees are assessed at a flat rate, or if they are assessed as a percentage of the amount invested. This may influence your decision to roll over other 401s into your active 401.

How to do it:

Fees To Consider Before You Roll Over A :

Youll want to pay close attention to the fees in your old employers account , as well as the fees in your new employers 401 or any IRAs you may be considering.

Many savers dont realize this, but 401s have a variety of fees associated with them, from the individual funds youve invested in to administrative fees from the provider itself theyre just usually quietly taken out of the account over time. You dont have much control over the investment options your employer offers in its 401, but you do typically have the option to pick certain funds, so be sure to look for the lower-cost options.

If youre looking to roll over your 401 into a traditional or Roth IRA, youll have to do more shopping to research how the fee structures will work for different types of investments and account providers. There are a few broad types of fees in an IRA you should look for.

First up: maintenance fees, which can be charged as a percentage of your assets or a flat annual fee. Many brokerages no longer charge this fee, especially for passively managed funds.

Then theres the investment fees, known as the expense ratio, for the underlying mutual funds and exchange-traded funds in your IRA. For these, look for a fee well below 1%.

Finally, when looking at fees related to investing, Meadows recommends avoiding IRAs that charge transaction fees, which are applied when you sell funds, or load fees, which are charged when you make deposits into your account.

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Should I Convert My Current 401 Into A Roth 401

If you already have a traditional 401 at your current job and the company just introduced a Roth 401 option, converting that 401 into a Roth might sound like a good idea. But is a conversion your best option? It depends on your situation.

The main drawback of converting a traditional 401 into a Roth 401 is the tax bill that comes with making the switch. Youre going to have to pay taxes on that money because it hasnt been taxed yet.

Lets say you have $100,000 in your traditional, pretax 401 and you want to convert the account into a Roth, after-tax 401. If youre in the 22% tax bracket, that means youd be paying $22,000 in taxes. Thats a lot of cash!

If you convert your 401 into a Roth 401, you need to have the cash on hand to cover the tax billno exceptions. Do not use money from the investment itself to pay the taxes. If you do, youll lose a lot more than $22,000. You could get charged a 10% early withdrawal penalty if youre under age 59 1/2. And youll also miss out on years of compound growth on that $22,000, which is typically about 11% a year.

For example, after 30 years, a $100,000 account could grow to about $2.67 million. An account with a starting point of $78,000 would grow to $2.08 million. Thats a difference of $587,000!

Want to run the math on your retirement account balance? Try our investment calculator that will do the calculations for you.

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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S To Complete An Ira Rollover

The rollover process itself is simple, but it’s important to follow IRS rules. Here are the steps:

One important difference between direct and indirect rollovers is withholding. Funds sent to you in an indirect rollover are subject to tax withholding: 10% for IRA funds and 20% for 401 and other employer-based plans. You can recover these funds when you file your taxes as long as you can show you deposited the full amount withdrawn from your original account into your new one.

You can avoid withholding by choosing a direct rollover, which has the added advantage of fewer stepsand therefore less opportunity for something to go wrong.

Benefits Of A 401 To Ira Rollover

If your new employer doesnt offer a retirement plan or permit 401 rollovers, moving your money into an IRA is an alternative to leaving the assets with your former company.

More choices, more control: While your investment options will likely be limited within a 401 plan, an IRA will provide you virtually endless possibilities, including stocks, bonds, real estate investment trusts , mutual funds and more. An IRA gives much more control and freedom to invest your money how you want and when you want.

Lower fees: Because you will have myriad options for your money within an IRA, its possible that your investments will have lower fees than a 401 plan. By parking your money in passively-managed assets, like index funds and ETFs, you may reduce your expenses.

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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.

A 401k Rollover Is One Of The Best Ways To Prepare For Your Financial Future But When Is A 401k Rollover Not A Good Idea

When you leave an employer after contributing to the sponsored 401K plan, you generally have one of three options. You can leave the investments with the old orphaned 401K plan, you can roll your 401K assets into a new plan at a new employer or you can do a 401K rollover into an individual retirement account which you control.

The most popular, and often the best option is to roll the 401K investments into an IRA account. This keeps your retirement savings in one place and gives you the greatest control over your financial future.

But it turns out there are a few instances when a 401K rollover is not the best option for your money. Managing your money to meet your retirement goals shouldnt be complicated but government rules on investing and legal protection have made it so. Make sure youre not in one of these three circumstances before you start the 401K rollover process.

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Convert Into A Roth Ira

The pros: Withdrawals are entirely tax-free in retirement, provided you’re over age 59½ and have held the account for five years or more. Roth IRAs are also exempt from RMDs.

The cons: Because Roth IRAs are funded with after-tax dollars, you’ll have to pay taxes on your existing 401 funds at the time of the conversion. A Roth IRA must be open for five years in order to withdraw earnings tax-free, and you’ll be subject to a 10% penalty if you withdraw any money before you’re 59½ without an exemption.