A Rollover Of Retirement Plan Assets To An Ira Is Not Your Only Option
A rollover of retirement plan assets to an IRA is not your only option. Carefully consider all of your available options which may include but not be limited to keeping your assets in your former employer’s plan rolling over assets to a new employer’s plan or taking a cash distribution . Prior to a decision, be sure to understand the benefits and limitations of your available options and consider factors such as differences in investment related expenses, plan or account fees, available investment options, distribution options, legal and creditor protections, the availability of loan provisions, tax treatment, and other concerns specific to your individual circumstances.
Drawbacks Of A 401 To Ira Rollover
IRA rollovers give individuals more control over their money, but they do come with potential tradeoffs.
Less legal protection: Unlike a 401, money in an IRA may be vulnerable to creditors and civil lawsuits. While blanket bankruptcy protections that 401s enjoy do extend to money that gets rolled into an IRA, those funds may be exposed in other legal proceedings.
Distribution age: The Rule of 55, which 401 investors can tap, does not apply to IRA rollovers. After rolling money over into an IRA, you have to wait to reach age 59.5 to withdraw funds without incurring an extra 10% penalty.
Higher fees: An IRA will give you more investment options than a 401, but you may lose out on access to institutional funds mutual funds that carry the lowest expense ratios and are only available to institutional investors, like 401 plans and hedge funds.
No loan option: Youll also forfeit the option to borrow against your 401. That choice does not exist for IRAs.
Rolling 401 Assets Into An Ira
When you retire or leave your job for any reason, you have the right to roll over your 401 assets to an IRA. You have a number of direct rollover options:
Rolling your traditional 401 to a traditional IRA. You can roll your traditional 401 assets into a new or existing traditional IRA. To initiate the rollover, you complete the forms required by both the IRA provider you choose and your 401 plan administrator. The money is moved directly, either electronically or by check. No taxes are due on the assets you move, and any new earnings accumulate tax deferred.
Rolling your Roth 401 to a Roth IRA. You can roll your Roth 401 assets into a new or existing Roth IRA with a custodian of your choice. You complete the forms required by the IRA provider and your 401 plan administrator, and the money is moved directly either electronically or by check. No taxes are due when the money is moved and any new earnings accumulate tax deferred. Earnings are eligible for tax-free withdrawal once the IRA has been open at least five years and you are at least 59½.
Rolling your traditional 401 to a Roth IRA. If your traditional 401 plan permits direct rollovers to a Roth IRA, you can roll over assets in your traditional 401 to a new or existing Roth IRA. Keep in mind youll have to pay taxes on the rollover amount you convert.
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Understand What You Can Do With Your Old 401
First, take a step back and review your options. There are four things you can do with your 401 through a previous employer:
Theres a chance that option one isnt on the table. Typically, you must have a balance of more than $5,000 to leave money in your old plan. And if you leave 401 funds with your old employer, it might be easy to lose track since you cant actively use or contribute to the account.
Cashing out your 401 is not the right move for most people, either. For one, cashing out triggers a big tax penalty youll have to pay the next time you file your taxes. It also means dismantling part of your all-important nest egg.
So the best option is usually to roll over your 401. The harder question to answer is whether you should roll over your 401 into your new employers plan or into an IRA.
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What You Can Do
- Roll over a traditional 401 into a traditional IRA, tax-free.
- Roll over a Roth 401 into a Roth IRA, tax-free.
- Roll over a traditional 401 into a Roth IRAthis would be considered a “Roth conversion,” so you’d owe taxes. Note: A Roth conversion that happens at the same time as your rollover may not be eligible for all plans. We can usually complete the Roth conversion once your pre-tax assets arrive into your Vanguard IRA account, though.
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Begin The Rollover Process
Youll have to fill out paperwork to conduct your rollover and it may require some back-and-forth conversations with your providers. You have several options to actually move the money from the old provider to the new one, but your best option is a direct rollover.
In a direct rollover, the funds are sent straight from your 401 into your new account without you touching the funds. Its important that you specify a direct rollover so that you dont have the check made payable to you. You could trigger a mandatory 20 percent withholding for taxes, and the IRS charges a 10 percent bonus penalty on withdrawals made before age 59 1/2.
Where Should You Transfer Your 401
You have several options on what to do with your 401 savings after retirement or when you change jobs. For example, you can:
The right choice depends on your needs, and thats a choice everybody needs to make after evaluating all of the options.
Want help finding the right place for your retirement savings? Thats exactly what I do. As a fee-only fidicuary advisor, I can provide advice whether you prefer to pay a flat fee or youd like me to handle investment management for you, and I dont earn any commissions. To help with that decision, learn more about me or take a look at the Pricing page to see if it makes sense to talk. Theres no obligation to chat.
Important:The different rules that apply to 401 and IRA accounts are confusing. Discuss any transfers with a professional advisor before you make any decisions. This article is not tax advice, and you need to verify details with a CPA and your employers plan administrator. Likewise, only an attorney authorized to work in your state can provide guidance on legal matters. Approach Financial, Inc. does not provide tax or legal services. This information might not be applicable to your situation, it may be out of date, and it may contain errors and omissions.
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How To Roll Over Your 401
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When leaving a job, you must decide what to do with your 401. You have the choice of leaving it where it is , rolling it over into a qualified retirement plan with your new employer , or rolling it into your IRA .
If you want to transfer funds from your 401 to a qualified plan of a new employer or your IRA, you have two options and some wrinkles to consider.
How Do I Roll Over My 401 To An Ira
When you leave your job for any reason, you have the option to roll over a 401 to an IRA. This involves opening an account with a broker or other financial institution and completing the paperwork with your 401 administrator to move your funds over.
Usually, any investments in your 401 will be sold. The money will then be deposited into your new account or you will receive a check that you must deposit into your IRA within 60 days to avoid early withdrawal penalties.
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When Do You Plan To Retire
If you separate from service with a given employer in or after the year in which you reach age 55, you can take penalty-free distributions from that employers 401 plan, whereas normally you have to wait until age 59.5 .
As such, if you plan to retire in or after the year you turn 55 but before you turn 59.5, having more money in your final employers 401 may make it easier to meet your living expenses without having to find another exception to the 10% penalty. If you expect to be in such a scenario , rolling your current 401 into your new 401 could be advantageous.
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*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.
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When Leaving Your Job You Can Typically Cash Out Your 401 Or Roll It Over Into A Different Retirement Account Certain Options Can Make You Much Richer
Both a 401 and IRA are tax-advantaged retirement accounts, but they work differently. 401s are sponsored by employers and often offer limited investment options. IRAs aren’t linked to employment. They can be opened with any brokerage firm or other financial institutions and have a wider variety of investment selections, but require more hands-on management.
Because 401s are offered through employers, you’ll need to determine what to do with yours when you leave your job. Your options include:
- Leave it invested
- Rollover to a new 401
- Rollover to an IRA
There are plenty of pros and cons to these options, but let’s take a close look at when rolling your workplace 401 into an IRA may make sense for you.
Keep Your 401 With Your Previous Employer
In this instance, you wont change a thing. Just make sure that you actively monitor your investments in the plan for performance and remain aware of any significant changes that occur.
If you really like your current investment options and are paying low fees on the investments, this might be the right choice for you.
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Move Your Old 401 Assets Into A New Employers Plan
You have the option to avoid paying taxes by completing a direct, or trustee-to-trustee, transfer from your old plan to your new employers plan, if the employers plan allows it.
It can be easy to pay less attention to your old retirement accounts, since you can no longer contribute. So, transferring old 401 assets to your new plan could make it easier to track your retirement savings.
You also have borrowing power if your new retirement plan lets participants borrow from their plan assets. The interest rate is often low. You may even repay the interest to yourself. If you roll your old plan into your new plan, youll have a bigger base of assets against which to borrow. One common borrowing limit is 50% of your vested balance, up to $50,000. Each plan sets its own rules.
Here are a few important steps to take to successfully move assets to your new employers retirement plan so as not to trigger a tax penalty:
Step 1: Find out whether your new employer has a defined contribution plan, such as a 401 or 403, that allows rollovers from other plans. Evaluate the new plans investment options to see whether they fit your investment style. If your new employer doesnt have a retirement plan, or if the portfolio options arent appealing, consider staying in your old employers plan. You could also set up a new rollover IRA at a credit union, bank, or brokerage firm of your choice.
The instructions you get should ask for this type of information:
Reasons To Rollover Your 401
Upon separation of service or retirement, most people roll their 401 plans over to an IRA to take advantage of the increased investment options and control over their investment account. Many 401 plans offer limited investment options that make it difficult to target specific sectors or asset classes of the market. Employees of small or midsized companies are also very susceptible to having only high cost and underperforming funds in their lineup. The lack of investment options is especially pronounced on the bond funds offered for their investments.
Another reason to take advantage of rolling a 401k to an IRA upon separation of service is to consolidate all your former employers 401s into one IRA account. If you change jobs frequently, you could have numerous 401 accounts and various custodians. Rolling them over to a single IRA can help you get a better overall picture of your asset allocation, and prevent you from having to remember multiple account logins.
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Option : Roll Over Your 401 To A Traditional Or Roth Ira
Rolling your 401 into an IRA is another option. With an IRA:
- Ability to add money: You should be able to add money to your IRA as long as you meet certain income requirements. This allows you to consolidate your retirement and other accounts, which may make it easier to monitor your investments and simplify account information at tax time.
- Investment choices: Traditional and Roth IRAs typically have a broader range of investment options than employer plans, but you may not have access to the same investments that are in your plan.
- Available services: Through our face-to-face approach to serving clients, your Edward Jones financial advisor can help you identify and implement strategies to help you reach your financial goals.
- Fees and expenses: Edward Jones IRA fees generally include an annual account fee, investment-related expenses and termination fees. For the current fee schedule, see IRA Schedule of Fees.
- Penalty-free distributions: Generally, you can take money from an IRA without tax penalties at age 59½.
- Required minimum distributions: Generally, you must take minimum distributions from a traditional IRA beginning at age 72.
Roll It Into A Traditional Individual Retirement Account
The pros: Because IRAs arent sponsored by employersyou own them directlyyou wont have to worry about making changes to your account should you change jobs again in the future. IRA providers may also offer a wider array of investment options and services than either your old or new employer-sponsored plan.
The cons: Once you roll your funds into an IRA, they may no longer be eligible for a future rollover into a 401 plan, and RMDs apply at age 72, regardless of whether youre employed. Also, youll need to specify how the funds in your traditional IRA are to be invested. Until you do so, the money will remain in cash or a cash equivalent, such as a money market account, rather than invested.
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How Much Can I Roll Over If Taxes Were Withheld From My Distribution
If you have not elected a direct rollover, in the case of a distribution from a retirement plan, or you have not elected out of withholding in the case of a distribution from an IRA, your plan administrator or IRA trustee will withhold taxes from your distribution. If you later roll the distribution over within 60 days, you must use other funds to make up for the amount withheld.
Example: Jordan, age 42, received a $10,000 eligible rollover distribution from her 401 plan. Her employer withheld $2,000 from her distribution.
If you roll over the full amount of any eligible rollover distribution you receive :
- Your entire distribution would be tax-free, and
- You would avoid the 10% additional tax on early distributions.
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.
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