What Spouses Should Know
If you are the spouse of someone who plans to roll over their 401 balance to an IRA, be aware that you’d lose the right to be the sole heir of that money. With the workplace plan, the beneficiary must be you, the spouse, unless you sign a waiver.
Once the money lands in the rollover IRA, the account owner can name any beneficiary they want without their spouse’s consent.
Here’s another potential misstep: Making a withdrawal from your 401 to give to your ex-spouse as dictated in a divorce agreement. That won’t work the money will be considered a distribution to you, subject to taxation, as well as potentially a penalty if you’re under age 59½.
In a divorce, retirement assets that are awarded to the ex-spouse can only be distributed penalty-free via a qualified domestic relations order, or QDRO. That document is separate from the divorce decree and must be approved by a judge.
Option : Roll It Into An Ira
If your new employer doesnt offer a 401 or you dont like their option, you can roll your 401 into an IRA.
Rolling over accounts is easier than it sounds. You may need to open an IRA at a brokerage company and sign a few papers that allow the brokerage to transfer the money into your new account. This option will help keep your balance growing tax deferred and you can continue to make tax-deferred contributions.
Youre Our First Priorityevery Time
NerdWallet, Inc. is an independent publisher and comparison service, not an investment advisor. Its articles, interactive tools and other content are provided to you for free, as self-help tools and for informational purposes only. They are not intended to provide investment advice. NerdWallet does not and cannot guarantee the accuracy or applicability of any information in regard to your individual circumstances. Examples are hypothetical, and we encourage you to seek personalized advice from qualified professionals regarding specific investment issues. Our estimates are based on past market performance, and past performance is not a guarantee of future performance.
We believe everyone should be able to make financial decisions with confidence. And while our site doesnt feature every company or financial product available on the market, were proud that the guidance we offer, the information we provide and the tools we create are objective, independent, straightforward and free.
So how do we make money? Our partners compensate us. This may influence which products we review and write about , but it in no way affects our recommendations or advice, which are grounded in thousands of hours of research. Our partners cannot pay us to guarantee favorable reviews of their products or services.Here is a list of our partners.
You May Like: Should I Keep My 401k Or Rollover To Ira
Transferring Your 401 To Your Bank Account
You can also skip the IRA and just transfer your 401 savings to a bank account. For example, you might prefer to move funds directly to a checking or savings account with your bank or credit union. Thats typically an option when you stop working, but be aware that moving money to your checking or savings account may be considered a taxable distribution. As a result, you could owe income taxes, additional penalty taxes, and other complications could arise.
IRA first? If you need to spend all of the money soon, transferring from your 401 to a bank account could make sense. But theres another option: Move the funds to an IRA, and then transfer only what you need to your bank account. The transfer to an IRA is generally not a taxable event, and banks often offer IRAs, although the investment options may be limited. If you only need to spend a portion of your savings, you can leave the rest of your retirement money in the IRA, and you only pay taxes on the amount you distribute .
Again, moving funds directly to a checking or savings account typically means you pay 20% mandatory tax withholding. That might be more than you need or want. Most IRAs, even if theyre not at your bank, allow you to establish an electronic link and transfer funds to your bank easily.
Avoid These Costly Mistakes When Rolling Over A 401 To An Ira
- Before you move your money, be sure you know the rules that differ between 401 plans and IRAs.
- If the rollover process is done incorrectly, it could be considered a distribution, which would make it subject to taxation and, possibly, an early withdrawal penalty.
- There are also some situations that call for caution before embarking on the rollover.
So you’ve left your job and want to move assets from your workplace savings plan to an individual retirement account.
You may want to pause before doing the rollover. If you’re not careful, you could make costly errors or lock yourself into a move that can’t be easily undone.
Both 401 plans and IRAs have the common purpose of letting you put away tax-advantaged savings for retirement. However, there are some rules that differ between the two. Even the rollover process itself can come with snags if you’re not careful.
More from Smart Tax Planning:
Here are some things to be aware of before initiating a rollover. These apply to traditional 401 plans and IRAs, whose contributions are generally made pre-tax.
Recommended Reading: What Percent To Put In 401k
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.
See What Our Clients Have To Say:
Client, 14 years
Client, 14 years
Client, 20 years
*Consider all available options, which include remaining with your current retirement plan, rolling over into a new employers plan or IRA, or cashing out the account value. When deciding between an employer-sponsored plan and IRA, there may be important differences to consider such as range of investment options, fees and expenses, availability of services, and distribution rules . Depending on your plans investment options, in some cases, the investment management fees associated with your plans investment options may be lower than similar investment options offered outside the plan.
1Morningstar gives its best ratings of 5 or 4 stars to the top 32.5% of all funds based on their risk-adjusted returns. The Overall Morningstar Rating is derived from a weighted average of the performance figures associated with a funds 3-, 5-, and 10-year Morningstar Rating metrics. As of 7/31/21, 69 of 154 of our Investor Class funds received an overall rating of 5 or 4 stars.
3Generally, as long as youve held the account at least 5 years and youre age 59½ or older.
Recommended Reading: Do Employers Match Roth 401k
Are You Planning Roth Conversions
If you are planning Roth conversions in your traditional IRA and your traditional IRA includes amounts from nondeductible contributions , then it can be wise to avoid rolling 401 money into a traditional IRA, because doing so would increase the amount of tax youd have to pay on your conversions.
This wouldnt necessarily mean, however, that you should roll your old 401 into the new 401. It might just mean that you should temporarily leave your old 401 where it is, with the plan to roll it into an IRA in some future year .
How To Transfer 401k To Ira
If you have an existing IRA, you can transfer your balance into the IRA you have later consider opening a new account if that’s a concern for you).
If you dont have an existing IRA, youll need to make two decisions up front: which type of rollover IRA you want and where to open that account.
There are three steps to a rollover IRA.
» Check out our complete list of top IRA account providers
Also Check: Where To Put 401k After Retirement
How To Complete An Ira To 401 Rollover
The first step is checking whether your employers 401 plan accepts IRA rollovers. Not all plans will allow you to roll over IRA assets. If they do, youll want to request a direct transfer to avoid any income tax or the 10% early withdrawal penalty.
If a direct transfer isnt an option, your IRA provider will send you a check for 80% of your accounts value and withhold the remaining 20% for taxes. You must deposit 100% of the value of your IRA into your 401 within 60 days or the transaction will be treated as an early distribution, triggering the 10% penalty and income taxes. The 20% that your IRA provider withheld will serve as a tax credit when you file your tax return.
How To Start A 401 To Ira Rollover
Doing a 401 rollover to IRA isnt terribly difficult. Once youve figured out exactly which IRA you want to use, set one up with that company. You can do this online, just like youd start any other financial account.
Next, get in touch with the financial company managing your 401. Ask if they have any special rollover requirements, and assuming youve met all of them, have a check for your assets mailed to the company you opened an IRA with. That company will then deposit it in your account. Youve officially completed your rollover!
Read Also: How To Find Out If You Have 401k Money
Lump Sum Pension Payment Vs Monthly Benefit
The last determinant is just like formerly called Puff Daddys song says, Its All About the Benjamins. You need to closely analyze how much the lump sum pension benefit option vs. the monthly benefit.
Let me highlight two situations where the choice was fairly obvious.
Example 1
I had one client who was offered an early buyout on his pension. He was almost 55 yet so he could start taking the payments immediately. The monthly benefit that they were offering was approximately $3000 per month.
He had elected to choose a lower amount so that his spouse would receive the same amount for her lifetime. That wasnt a bad option, but just to be sure, lets look at the lump sum amount.
The pension was an older one that was more beneficial to tenured employees so the lump sum amount was only around $250,000. I say only because assuming no growth on the dollar amount, then the client would have completely exhausted his pension in just under 7 years right before he turned 62.
In this case, it was a no brainer to elect the guaranteed monthly benefit.
Example 2
Another client had just turned 62 and her company was offering her a lump sum amount of $600,000. Not to bad, but lets look at the monthly benefit. The monthly benefit amounted to $4,000 per month per year. Thus far its not such a clear cut decision.
How To Transfer From Your 401 To An Ira
When youre ready to make the transfer, you need to do three things:
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:
A financial advisor like me can guide you through the process if you have questions.
What to Say
Where to Deposit
Indirect vs. Direct Rollovers
Read Also: When To Withdraw From 401k
You Prefer Convenience Over Control
Perhaps you opened an IRA with the intention of putting together a diverse portfolio and actively managing your investments. However, youre now finding that you dont have the time or energy to devote to your portfolio and feel that youre in over your head. Rolling over your IRA to a 401 and giving up some control may better fit your needs as an investor.
Save Money During A Roth Conversion
This is where things can get tricky. If you plan to convert your traditional IRA into a Roth IRA to take advantage of tax-free growth, you can avoid immediate tax consequences by first rolling over any pre-tax contributions over to your 401. Youll want to consult a tax professional when converting a traditional IRA to a Roth option.
You May Like: How To Transfer 401k From Fidelity To Vanguard
Roll It Over Into An Ira
If you’re not moving to a new employer, or your new employer doesn’t offer a retirement plan, you still have a good option. You can roll your old 401 into an IRA.
You’ll be opening the account on your own, through the financial institution of your choice. The possibilities are pretty much limitless. That is, you’re no longer restricted to the options made available by an employer.
The biggest advantage of rolling a 401 into an IRA is the freedom to invest how you want, where you want, and in what you want, says John J. Riley, AIF, founder and chief investment strategist for Cornerstone Investment Services LLC, Providence, Rhode Island. There are few limits on an IRA rollover.
One item you might want to consider is that in some states, such as California, if you are in the middle of a lawsuit or think there is the potential for a future claim against you, you may want to leave your money in a 401 instead of rolling it into an IRA, says financial advisor Jarrett B. Topel, CFP, Topel & DiStasi Wealth Management LLC, Berkeley, California. There is more creditor protection in California with 401s than there is with IRAs. In other words, it is harder for creditors/plaintiffs to get at the money in your 401 than it is to get at the money in your IRA.
Should You Roll Over Your 401
To start, its worth knowing that you dont have to make a 401-to-IRA rollover, even if you do leave your job. You have the option of leaving the money youve invested in the plan at your old company. You cant keep contributing to it, but it will stay invested and if your investments go up, youll continue to see your account grow. This is called an orphan account.
Do you like the way your money is invested currently? If so, you may want to consider keeping your money in the existing plan. If you currently arent working but anticipate taking a new job soon, you could leave your money at your old plan temporarily and put it into your new companys plan once you have access to it.
For those who dont think theyll end up in another 401 plan but still want to save more for retirement, it might make sense to do a 401-to-IRA rollover. Remember, even though you still have your account at your old companys 401, you wont have the ability to make more contributions.
Recommended Reading: What Age Can You Start A 401k
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. Youll also miss out on years of compound interest, which is typically about 10%. So after 30 years, a $100,000 account could grow to be $436,000 more than an account with a $78,000 starting point because of compound interest.
There are also alternatives to a 401 conversion to consider. For example, you can leave your traditional 401 alone and start putting money from your paycheck into a new Roth 401 instead. That way, you dont have to worry about taking a hit paying taxes now and still take advantage of the Roths tax-free growth later.
How Do 401s And Iras Work
A 401 is an employer-sponsored retirement savings plan that allows employees to save pre-tax money from their paychecks, often with a partial match from their employers. Money deposited into 401 accounts is not taxed until it is withdrawn. It gets its name from the section of the tax code that covers it.
An IRA is an individual retirement account in which the saver directly deposits pre-tax funds. Often, individuals who leave companies where they had 401 plans will roll the funds from them into IRAs.
Regardless of whether you own a 401k or an IRA, once a distribution is taken, it is taxable as ordinary income. Additionally, if you are withdrawing money prior to the age of 59½, then the IRS levies an additional 10 percent penalty tax. The same rules of taxation apply when you roll a 401 plan or an IRA into an annuity.
You May Like: Can You Withdraw Your 401k If You Quit Your Job
