Should I Rollover My 401k To An Ira
The 401k rollover to IRA is the most common type of rollover. You know that commercial with the little green line? This is the type of rollover they are referring to. You take your money from your 401K and put it directly into whats called a Rollover IRA.
Its a specific type of traditional IRA where you can stash your old 401k funds. Whats great about this move is that there are no penalties, no taxes, and if you use the right broker, you get a lot more control over your money with much few expenses than if you left the money in your 401k.
Note that even though this is the best way for most people to rollover their 401k, there are some reasons not to do a rollover: youre retiring early, there are stock options in your 401k, or youre planning a Roth conversion. If thats the case, discuss it with your CPA before making the rollover.
Access More Investment Choices
In a 401 plan, youre limited to the investment choices picked by your employer, usually a selection of mutual funds. If you roll over your 401 to an IRA, you may be able to expand your investment choices to include a broader range of funds, exchange traded funds or even individual stocks and bonds. Youll get more control over your portfolio, especially if you use a self-directed IRA, which allows you to invest money into more unorthodox assets like real estate.
Option : Cash Out Your Old 401
Another option is cashing out your 401, which does exactly what you would expect provides cash. But there are many implications to consider. The cash you withdraw is considered income, and you may incur local, state and federal taxes by doing so. You will lose the benefit of giving your accounts investments time to grow, and you may need to work longer to make up the difference. Whats more, if you leave your employer prior to the year you turn 55 and are younger than 59 ½, you will be required to pay a 10% early withdrawal penalty on top of any taxes on the money.
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Pros And Cons Of Transferring Your 401 To Your New :
- Consolidate: this makes it easier to manage and invest consistently. You cant forget about your old retirement plan because you took it with you.
- Your investment options may be limited or worse than your old plan
- Consider costs: rolling your 401 into your new 401 means you could pay higher fees. Plan fees could be spread by participant assets and trading costs will also apply. If you only have access to high-cost mutual funds and limited ETFs, this will also add to your expenses. This reduces your returns.
- Final: you cant roll the money back once you roll it in. Your assets will have to stay in the plan until you switch jobs again
Open Your New Ira Account
You generally have two options for where to get an IRA: an online broker or a robo-advisor. The option you choose depends on whether you’re a “manage it for me” type or a DIY type.
If you’re not interested in picking individual investments, a robo-advisor can do that for you. Robo-advisors build personalized portfolios using low-cost funds based on your preferences, then rebalance those funds over time to help you stay on track, all for a much lower fee than a conventional investment manager.
If you want to build and manage your own investment portfolio, an online broker lets you buy and sell investments yourself. Look for a provider that charges no account fees, offers a wide selection of low-cost investments and has a reputation for good customer service.
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Drawbacks Of Rolling Over Into A New 401
Like keeping your money in your previous employers plan, rolling over into a new 401 limits your control of your money and poses some other potential drawbacks.
Higher fees: After comparing fees and expenses, you may find that the new plan is more expensive than the previous one. Remember, even a margin of a percentage point can drastically eat into your earnings over a long period of time.
Less diversification: The investments offered in the new plan may be less varied than your old plan or potential IRA investments. And because the account will be managed by someone else, you wont have much of a say in how your money is invested.
Talk To A Pro Before Converting Your 401
An experienced investing professional can help you figure out the best way to handle your investment accounts in order to keep you on track toward your retirement goals. If you dont understand something, ask questions. We dont ever want you to make a financial move you dont understand.
If youre looking for an investing pro in your area, use our SmartVestor program! Its a free way to connect with top-notch investing professionals who are ready to help you make the most of your retirement dollars.
About the author
Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.
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Should I Roll My 401k Into My New 401k Or Into An Ira
A reader writes in, asking
If Im leaving my employer to take a new position, how should I determine whether to roll my current 401K into the new 401K or into an IRA?
If you have already decided that you do want to roll your 401 somewhere else has very expensive investment options), there are a handful of factors to consider. Not coincidentally, those factors are very similar to the factors considered when determining whether to roll a 401 over to an IRA in the first place.
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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Request A Direct Transfer Rollover From Your Old 401
Remember, you need to ask for a direct transfer rollover from the plan administrator of your old 401this could be your old employer or a third party. Theyll give you a form to fill out that will usually ask you to provide your information and account information for the plan youre transferring money from and the account your transferring the money to.
When Not To Roll Over Your Retirement Account
There can be good reasons to NOT roll over an old 401 or 403 to an IRA. For tax reasons, its generally not a good idea to roll over company stock that has appreciated in value.
Second, if youre afraid of bankruptcy or are planning to retire early, leveraging your employers 401 or 403 provides additional protection from creditors and could allow you to take out funds before age 59 ½ without penalty.
Finally, while this is not a reason to avoid a rollover to an IRA, its important to note that many financial professionals will get a commission if you use them to roll your dollars to an IRA, but not if you roll your dollars to your new 401.
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What Is A Rollover Ira
A rollover IRA is an individual retirement account often used by those who have changed jobs or retired. A rollover IRA allows individuals to move their employer-sponsored retirement accounts without incurring tax penalties and remain invested tax-deferred. Consolidating multiple employer-sponsored retirement accounts can make it easier to monitor your retirement savings.
*Note: If you have an existing rollover or traditional IRA at Prudential, you can roll your assets into that account.
Rollover To Another 401
If you value the simplicity of having all your retirement funds in one place, are looking to minimize account maintenance fees or want to prepare yourself to take advantage of the Rule of 55, a 401-to-401 rollover can be a good choice. By rolling over an old 401 into a plan with your new employer, you can keep everything in one place. Evaluate investment options carefully, though, to make sure there arent high fees and that the investments available work for you.
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Should You Leave Your 401 At Your Old Job
Leaving your 401 behind isnt the best long-term plan. If you want to leave it at your old job, assuming your account is $5,000 or more, you probably can. But there are better ways to manage your retirement savings.
Benefits: nothing changes.
Downside: nothing changes, harder to view/manage your accounts, easy to forget about it.
There Are Plenty Of Questions To Ask Before Rolling Over Your Old 401
Rollovers are a great way to consolidate your retirement accounts, especially if you’ve moved from job to job a few times, but they should be done on a case-by-case basis.
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There are plenty of reasons why rolling retirement assets from one account to another makes sense, but there are also plenty of questions to ask and answer before making that decision.
Investors may decide to move money from one retirement plan to another because theyre switching jobs, or because they found a better investment opportunity in another account. Some retirees might want to consolidate their retirement assets, while others may be attempting to diversify the tax component of their savings by moving a portion of their funds into a Roth account.
Retirement tip of the week: Wondering if you should roll over an old 401 plan or merge a few different retirement accounts? Before you do anything, think about the tax implications, the fees, the types of investments available and when youll need the money.
Rollovers are neither right nor wrong by themselves. The decision to roll assets over should be made on a case-by-case basis. For example, some people might want to leave the money in their former employers plan because of the investment strategy available there, said Carl Holubowich, a certified financial planner and a principal of advisory firm Armstrong, Fleming and Moore, Inc. They might also be ready to retire, and want to use the money soon.
What to look out for
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Decide What Kind Of Account You Want
Your first decision is what kind of account youre rolling over your money to, and that decision depends a lot on the options available to you and whether you want to invest yourself.
When youre thinking about a rollover, you have two big options: move it to your current 401 or move it into an IRA. As youre trying to decide, ask yourself the following questions:
- Do you want to invest the money yourself or would you rather have someone do it for you? If you want to do it yourself, an IRA may be a good option. But even if you want someone to do it for you, you may want to check out an IRA at a robo-advisor, which can design a portfolio for your needs. But do-it-for-me investors may also prefer to make a rollover into your current employers 401 plan.
- Does your old 401 have low-cost investment options with potentially attractive returns, and does your current 401 offer similar or better options? If youre thinking about a rollover to your current 401 plan, youll want to ensure its a better fit than your old plan. If its not, then a rollover into an IRA could make a lot of sense, since youll be able to invest in anything that trades in the market. Otherwise, maybe it makes sense to keep your old 401.
- Does your current 401 plan offer access to financial planners to help you invest? If so, it could make sense to roll your old 401 into your new 401. If you move money to an IRA, youll have to manage it completely and pick investments or hire someone to do so.
What Happens To Your 401 When You Leave A Job
When you leave a job, you have a few options when it comes to your 401. It depends on how much you have in your 401 when you leave and what your planâs policies are as dictated in its summary plan description. Knowing your 401 balance before leaving and having a plan ahead of time can help save you a lot of time and stress.
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Rolling Over Your 401 To A Traditional Ira Vs A Roth Ira
You have the option of rolling your 401 into either a traditional IRA or a Roth IRA. One isnt better than the other, and ultimately its up to you and your investment goals.
You do have to worry about a few things, though, and the major difference is this: Roth IRAs require after-tax contributions. If youre rolling over money from a traditional 401, then you havent paid taxes on that money as it came out of your salary before you got your paycheck. As a result, rolling your traditional 401 balance over to a Roth IRA will require you to pay income taxes on the entire balance in the year that you do the rollover. This could mean thousands of dollars in taxes. So just be cautious of this.
However, rolling a traditional 401 into a traditional IRA is easier, since both contain pre-tax dollars. You dont have to worry about triggering a taxable event.
On the same note, a Roth 401 and Roth IRA are both funded with after-tax dollars, meaning rolling one into the other wouldnt require a tax payment.
Paying income taxes by rolling a traditional 401 into a Roth IRA isnt necessarily a reason not to do it: Roth IRAs can be a powerful retirement savings tool, and some investors may prefer to pay the tax bill now for the benefit of withdrawing the money tax-free during retirement.
But whatever decision you make, its important that you understand the consequences and have your budget ready.
Roll Over Your 401 To A Roth Ira
If you’re transitioning to a new job or heading into retirement, rolling over your 401 to a Roth IRA can help you continue to save for retirement while letting any earnings grow tax-free.2
- You can’t borrow against a Roth IRA as you can with a 401.
- Any Traditional 401 assets that are rolled into a Roth IRA are subject to taxes at the time of conversion.
- You may pay annual fees or other fees for maintaining your Roth IRA at some companies, or you may face higher investing fees, pricing, and expenses than you did with your 401.
- Some investments offered in a 401 plan may not be offered in a Roth IRA.
- Your IRA assets are generally protected from creditors only in the case of bankruptcy.
- Rolling over company stock may have negative tax implications.
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Option : Doing Nothing
Lastly, you may opt to leave your 401 accounts exactly as they are. Here are some pros and cons of this strategy:
1. You are happy with the financial institution and/or investments
If you like your current investment allocation and investment options and want to continue using them, you may choose to leave your 401 as it is.
1. Difficult to manage
It could be hard to manage a cohesive investing strategy across multiple accounts. This may be especially true for someone that has multiple accounts at different institutions.
2. Cannot add money to an old employer-sponsored 401
It is not possible to contribute new money to an old 401 account that was previously tied to an employer. New money must go into a current 401 or some other self-directed retirement account, such as a Solo 401, Roth IRA, or Traditional IRA.
If you do not currently have access to an employer-sponsored 401, you may want to seek out another retirement account for which you can make contributions.
3. Possible maintenance fees
Old 401 accounts may charge monthly or annual fees such as account maintenance fees. By consolidating, it may be possible to eliminate all or most of these fees.
For example, a person could roll old 401 accounts that charge a maintenance fee into an account that has no such fee, whether that be their current 401 or a Traditional IRA.
4. Limited investing options
In general, a Traditional IRA can provide more flexibility and investing options than a 401.
Where Do You Have Better Investment Options
If your new employer-sponsored plan has investment options that are better than what youd have access to in a regular IRA, rolling your money into the new employer plan can be advantageous. Common examples would be people starting a job with the federal government or people whose new employer plan includes something like Vanguard Institutional share classes .
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