What You Contribute To A 401 Is Yours To Keep
All the money you’ve contributed to a company retirement plan is still yours. If you were eligible for an employer match, you may also have rights to your employer’s contributions, depending on your vesting schedule. A company may require up to five years before granting you complete ownership to its contributions.
Rollover Iras: A Way To Combine Old 401s And Other Retirement Accounts
If you decide a 401 rollover is right for you, we’re here to help. Call a Rollover Consultant at .
One great thing about a 401 retirement savings plan is that your assets are often portable when you leave a job. But what should you do with them? Rolling over your 401 to an IRA is one way to go, but you should consider your options before making a decision. There are several factors to consider based on your personal circumstances. The information provided here can help you decide.
Don’t Roll Over Your 401 To An Ira Just Yet
You’ve left your job. What should you do with the 401 plan you’ve faithfully contributed to for years? Conventional wisdom says to roll it over into an individual retirement account , and in many cases, that is the best course of action. But there are times when a rollover is not your best option.
Let’s take a look at five of those situations and the rationale for keeping your 401or, if you’re a public or nonprofit employee, your 403 or 457 planin place at your now-former employer’s plan.
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How To Roll Over Your Old 401
8 Min Read | Sep 8, 2022
Forty-seven million. Thats how many people left their jobs in 2021 at the height of the Great Resignation. And millions more are planning to quit this year.1
While theres nothing wrong with blazing new career paths, many of those folks are leaving a trail of forgotten 401s, sometimes with thousands of dollars in retirement savings left behind. Maybe youre one of them!
If youve got money gathering dust in a long-forgotten retirement account, its time to find it a new home. Thats where a 401 rollover comes in.
The Option To Convert To A Roth
An IRA rollover opens up the possibility of switching to a Roth account. s, a Roth IRA is the preferred rollover option.) With Roth IRAs, you pay taxes on the money you contribute when you contribute it, but there is no tax due when you withdraw money, which is the opposite of a traditional IRA. Nor do you have to take required minimum distributions at age 72 or ever from a Roth IRA.
If you believe that you will be in a higher tax bracket or that tax rates will be generally higher when you start needing your IRA money, switching to a Rothand taking the tax hit nowmight be in your best interest.
If you’re under the age of 59½, it’s also a lot easier to withdraw funds from a Roth IRA than from a traditional one. In most cases, there are no early withdrawal penalties for your contributions, but there are penalties if you take out any investment earnings.
Your 401 plan rules may only permit rollovers to a traditional IRA. If so, you’ll have to do that first and then convert the traditional IRA into a Roth. There are a number of strategies for when and how to convert your traditional IRA to a Roth that can minimize your tax burden. Should the market experience a significant downturn, converting a traditional IRA that is down, say 20% or more, to a Roth will result in less tax due at the time of the conversion. If you plan to hold the investments until they recover, that could be an attractive strategy.
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Why You Should Consolidate Those 401s And Iras
- Around 25 million Americans left behind money in a 401 when separating from an old job from 2004 to 2014, according to a study from the Government Accountability Office.
- Merging multiple 401s and/or IRAs generally makes things like portfolio rebalancing and mandatory account withdrawals much simpler.
- When leaving a job, savers are typically better off moving an old 401 account to their new workplace plan instead of an IRA, according to some financial experts.
Many Americans hold multiple retirement accounts and there are many reasons why they should consider combining those nest eggs instead of letting them gather dust.
Around 25 million Americans left behind money in a 401 account when separating from an old job, according to the Government Accountability Office, which analyzed 10 years worth of data from the 2004 to 2014 period. Millions left behind money in two or more accounts.
That represents about 37% of the roughly 68 million workers actively saving in a 401-type plan through their workplace, according to figures from the Labor Department.
The relatively high incidence of stranded 401 funds is understandable, given that workers over age 25 only stay at the same job for around five years, according to the Bureau of Labor Statistics.
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How To Transfer A Traditional Ira Into A 401
If youve weighed the choices and decided youd like to combine retirement plan balances inside your 401 and your 401 plan provider is ready and willing to take those IRA assets there are steps you need to take to do it right.
First, know that you cant roll a Roth IRA into a 401 not even into a Roth 401. Were specifically talking about pretax money in a traditional IRA here.
As with a 401 rollover, the easiest way to roll a traditional IRA into a 401 is to request a direct transfer, which moves the money from your IRA into your 401 without it ever touching your hands. Contact your 401 plan administrator for instructions on how to do this following its guidance will allow you to avoid taxes and penalties.
About the author:Arielle OShea is a NerdWallet authority on retirement and investing, with appearances on the Today Show, NBC Nightly News and other national media. Read more
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Transfer Your 401 To Your New Job
Transferring your 401 to your new job is like a 401 to 401 rollover. Depending on the set up of your new plan, its probably a better option than leaving it behind but might not be as beneficial as rolling your 401 to an IRA. Check the plan documents of your new employers 401 to confirm the plan accepts incoming rollovers.
When You Should Consider Converting A 401 To A Roth Ira
If you anticipate your tax bracket being higher in retirement due to required minimum distributions or other sources of income, then it may make sense to pay income tax now while you are in a lower tax bracket.
Another reason to convert to a Roth is when you have a sizable pool of tax-free Roth assets relative to your tax-deferred retirement accounts. The tax benefits of a Roth IRA are most significant in this case. If your Roth IRA savings are only 5% or 10% of your entire retirement savings, it may not be enough to justify the loss of tax deferral.
Keep this in mind as an isolated conversion of relatively small dollar value may not make a material impact on your overall wealth. A financial plan can help you weigh whether maintaining tax-deferred growth is a better strategy to maximize your wealth.
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Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. Weve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next.
Bankrate follows a strict editorial policy, so you can trust that were putting your interests first. All of our content is authored by highly qualified professionals and edited by subject matter experts, who ensure everything we publish is objective, accurate and trustworthy.
Our reporters and editors focus on the points consumers care about most how to save for retirement, understanding the types of accounts, how to choose investments and more so you can feel confident when planning for your future.
Quick Review What To Do With Your 401
Before we get into the nitty-gritty of why an IRA rollover is a good idea, lets first review exactly what your options are for your 401 when you quit your job.
About a week after my last day at work, I received a letter explaining that I had the following options:
Well talk more about options 1-3 below.
Note if youre under age 59-1/2 that you NEVER want to take option 4 unless youve fallen on really, really, really hard times financially.
Why is that a bad choice? Not only are you destroying your retirement nest egg, but youll also have to pay both taxes and a 10% penalty for the balance you withdraw. Think about it: For every $100,000, youll probably owe 25% in taxes and a 10% penalty . That pretty much wipes out all your earnings!
Believe it or not, according to a report from the Transamerica Center for Retirement Studies, 25% of people took this route.
Short version dont do it!
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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.
Benefits Of Keeping Your 401 With A Former Employer
Leaving your 401 assets within your former companys plan is the least labor-intensive solution, it may save you money in fees and keep your money protected from possible legal action.
Convenience: Leaving your money in your previous companys 401 offers convenience to investors who dont want to bother with contemplating a potential rollover. After all, this is the simplest option you just leave your account where it is.
Lower fees: The fees and operating costs of your former employers plan may be lower than an individual retirement account or your new companys 401. If thats the case, the lower fees may equate to thousands of dollars in additional earnings in the years and decades to come.
Legal protections: Staying in your former employers 401 will also shield your retirement savings from creditors, lawsuits and potential bankruptcy filings. Federal law protects assets in 401 accounts in the event of such legal proceedings.
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Keeping Your 401 With A Former Employer
If your ex-employer allows it, you can leave your 401 money where it is. Reasons to do this include good investment options and reasonable fees with your former employers plan. Keep in mind that you may not be able to ask the plan administrator any questions, you may pay higher 401 fees as an ex-employee, and you cant make additional contributions.
Another noteworthy thing to consider is that your former employer could decide to move your old 401 account to another provider. If your balance is between $1,000 and $5,000 and your former employer wants to close your old 401 account, your former employer can, but it is required to transfer the balance to an IRA in your name and notify you in writing. For balances under $1,000, your former employer can send you a check, which you’d need to put in a retirement account within 60 days to avoid taxes and penalties.
Why You Might Not Want To Combine Your Ira With Your 401
On the flip side, there are plenty of areas where a traditional IRA has a leg up on a 401 that is, of course, why so many people roll a 401 into an IRA. Here are the biggest you should know:
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Wider investment selection: Within an IRA, you can invest in nearly anything under the sun not just the mutual funds, index funds and exchange-traded funds that show up in 401 plans, but also individual stocks and even options . You can also shop around for the absolutely lowest-cost funds, which can save you money. As noted above, you should look closely at your 401 plan and its investments to see if youd save money by leaving your funds in your IRA.
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More loopholes for early withdrawals: Aside from the aforementioned loans, a 401 may allow hardship withdrawals in certain situations the IRS defines hardship as an immediate and heavy need, which means things like unreimbursed medical expenses, funeral expenses or disability. Those will waive the 10% penalty on early distributions youll still owe income taxes on the withdrawal. But a traditional IRA casts a wider net, allowing early distributions without penalty but with taxes still owed for higher education expenses and a first-time home purchase .
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Low-cost options for investment management: If your 401 plan doesnt come with anything in the way of investment advice, and you want that sort of thing, youll have more options for getting it on the cheap within an IRA if youre open to a robo-advisor. .)
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Investment Options And Flexibility
Most 401s offer a relatively limited menu of core options. The investment options are determined by your employer and the type of plan it offers. If your plan includes a specific investment that isnt available through an IRA and is integral to your investment strategy, that may be a reason for you to stay put.
With an IRA, the world is your oyster, says Lobel. There are thousands of low-cost ETFs and mutual funds from which to choose. Thats in addition to individual stocks, CDs, and other investment vehicles.
Lobel cautions that for some people, more choice can be overwhelming. But with a bit of research, you can find the right investments to match your goals and give you the diversification thats key to investment success.
Pro #: You May Gain Flexibility
Your new employers plan may have different investment options, loan options, protections against potential creditors, or other benefits that better suit your needs than your former employers plan. If you continue working until and beyond 72 years of age, you may be excused from required minimum distributions if your new employers plan allows it.
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What Happens If A Check From My Former Employer Plan Is Made To Me
The distribution will be subject to mandatory tax withholding of 20%, even if you intend to roll it over later. This withholding can be credited to your income tax liability when you file your federal tax return if you roll over the full amount of any eligible distribution you receive within 60 days.
If you are not able to make up for the 20% withheld, the IRS will consider the 20% a taxable distribution it will be subject to regular income tax and, if you are under age 59½, an additional 10% early-withdrawal penalty.
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Considerations Before Doing A 401 Rollover:
- Consider whether the plan expenses are offset by the employer and if theres a brokerage window to invest outside of the plan options
- Consider what, if any, other services the plan extends to terminated participants
- Evaluate costs at the new financial institution including advisory, custodial fees, and fund expenses on the new asset allocation
- for assets in an IRA may be lower than a qualified plan
- Do you have company stock in your 401? If so, be aware of the potential tax benefits of net unrealized appreciation
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Are There Tax Implications Of Ira Rollovers
Depending on how you move your money, there might be tax implications. If you move your money into an account with the same tax treatment as your old account, there shouldnt be issues as long as you deposit any checks you receive from your 401 into a tax-advantaged retirement account within 60 days. However, if you move a traditional 401 into a Roth IRA, you could end up with a tax bill. Check with a tax professional to find out how you may be affected.
Disadvantages Of An Ira Rollover
A rollover is not for everyone. A few cons to rolling over your accounts include:
- . You may have credit and bankruptcy protections by leaving funds in a 401k as protection from creditors vary by state under IRA rules.
- Loan options are not available. The funds may be less accessible. You may be able to get a loan from an employer-sponsored 401k account, but never from an IRA.
- Minimum distribution requirements. You can generally withdraw funds without a 10% early withdrawal penalty from a 401k if you leave your employer at age 55 or older. With an IRA you generally have to wait until you are age 59 1/2 to withdraw funds in order to avoid a 10% early withdrawal penalty. The Internal Revenue Service offers more information on tax scenarios as well as a rollover chart.
- More fees. You may be responsible for higher account fees as compared to a 401k which has access to lower-cost institutional investment funds because of group buying power.
- Tax rules on withdrawals. You may be eligible for favorable tax treatment on withdrawals if your 401K is invested in company stock.
Neither State Farm nor its agents provide tax or legal advice.
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