Rollover: The Complete Guide
How much do you know about 401k rollovers? 401 plans are a great way to save money tax-free, and 401s typically have many investment options. However, there may come a time when the 401k participant decides they would like to change jobs or retire from their current position. This is where 401 rollovers become important. Unfortunately, rolling over retirement funds can be difficult with so many different rules and regulations that govern what can be done with 401ks. In this guide, I will discuss some of the basics of 401k rollovers and provide information on how you can make sure your plan complies with all federal requirements before rolling it over to another employers qualified plan or an IRA.
Q I Retired From My Job On April 3 2020 I Have A 401 With This Employer With A Balance Of Approximately $600000 Should I Rollover The 401 Into An Ira Or Leave It Where It Is Retired
A. Congratulations on your retirement.
There are many reasons why someone may leave their 401 in place after leaving a job.
The perception of lower costs is one of the main reasons.
But theres been a lot of questions surrounding the lack of transparency of 401 plan fees.
Some 401 plan costs are actually quite high, said Matthew DeFelice, a certified financial planner with U.S. Financial Services in Fairfield.
I think its worth looking at the internal fund fees expense ratios on the investments in your 401 and comparing them to what similar investments may cost in an IRA, he said. This will require a bit of research on your part, but its worthwhile to take the time to do it so you know what you are dealing with.
Arguably the best reason for keeping assets in a 401 plan whether thats rolling it into your new employers 401 or keeping your old one applies only if youre planning to retire between ages 55 and 59 ½, DeFelice said.
In general, you must pay a 10% early withdrawal penalty if you take money out of your 401 or IRA before you reach age 59½, DeFelice said.
There is, however, an important exception for 401 plans: Workers who leave their jobs in the calendar year they turn 55 or later can take penalty-free withdrawals from that employers 401 plan, he said.
But if you roll that money into an IRA, youll have to wait until youre 59½ to avoid the penalty unless you qualify for one of a handful of exceptions, he said.
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Keep Your 401k At Your Former Employer
Under certain circumstances, you might consider leaving your money in your previous employers 401k plan. If your plan offers excellent fund choices with lower fees than their retail competitors, it might be best to keep your money where it is. If the account lacks management fees, thats another advantage to leaving the money where it is.
Keeping your money at your former employer boils down to fees and available investment options. A rollover provides access to greater fund choices, but if youre happy with the fees and the investment options at your former employer, you might want to keep the money where it is.
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How Do I Complete A Rollover
Should You Stay In The 401 Or Roll Over
Handling the 401 balance at retirement once was an easy decision. In almost all cases, it made sense to have the balance rolled over into an IRA. Things are changing. New retirees might find it advantageous to stay with their 401 plans after retirement.
There are many reasons to transfer out of the 401 plan at retirement. The plan often has limited investment options, while an IRA at a mutual fund family could invest in any fund at that family and an IRA at a broker could invest in a wide range of funds at different fund families.
Distribution options are a big reason to roll over the account to an IRA. A 401 plan is not required to provide all the distribution options open to IRA owners. Stretch out distribution schedules that could make distributions over many years are not required to be offered. And those who inherited 401s can be forced to withdraw the entire account, and pay taxes on it, in a short time.
A number of companies actively discouraged former employees from staying with the plan by limiting their distribution options and the ability to change investments, prohibiting loans, and imposing other restrictions.
Several things have changed.
In addition, funds that are closed to new investors often remain open to contributions from 401 plans .
These changes do not mean that every retiring employee should leave his or her account in a 401 plan instead of rolling it over into an IRA.
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Losing Access To Superior Investment Options
One potential problem with 401 plans is that your investment options are limited to the choices provided by the plan. On the flip side, some large companies and government plans can use the economy of scale to provide superior investments than retail investors can get on their own.
One example of the latter would include plans that offer ultra-low cost Vanguard Institutional Shares. Another example of a plan with great investment options is the Thrift Savings Plan offered to many government employees.
If your work sponsored retirement account offers acceptable investment options, and especially if it offers superior funds than individual investors can purchase, there are compelling benefits to not roll over your account to an IRA.
What If I Have Employer Stock In My Employer
You can choose to roll company stock into an IRA or a taxable brokerage account. If you decide to roll the stock to an IRA, its full value will be taxed as income at your regular rate if you move the stock to a taxable brokerage account, you might be able to save money by paying capital gains taxes on the difference between the stocks value and the price you paid for it. There are tax benefits to each, so consult your tax advisor and ask about the net unrealized appreciation strategy.
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Review Your 401s Payout Policy
One key question in retirement is how youll create an income stream that is, a retirement paycheck from your savings. If your 401 lets you set up regular withdrawals or an installment payment plan, then it might make sense to keep your money in the plan.
If your 401 doesn’t allow for periodic payouts, consider rolling your savings over to an IRA.
A growing number of employers allow retiring workers to say, Pay out X dollars per month, says Steve Vernon, author of Retirement Game-Changers and a research scholar at the Stanford Center on Longevity.
But 401 plans vary widely. Some allow lump-sum disbursements only. Others might offer partial withdrawals, but the number is limited. If and when you need periodic payments, youll need an account that allows that. If your 401 doesnt, consider rolling your savings over to an individual retirement account. See this quick-start guide on 401 rollovers for more on this process.
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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.
Decide Where You Want The Money To Go
If youre making a rollover from your old 401 account to your current one, you know exactly where your money is going. If youre rolling it over to an IRA, however, youll have to set up an IRA at a bank or brokerage if you havent already done so.
Bankrate has reviewed the best places to roll over your 401, including brokerage options for those who want to do it themselves and robo-advisor options for those who want a professional to design a portfolio for them.
Bankrate has comprehensive brokerage reviews that can help you compare key areas at each provider. Youll find information on minimum balance requirements, investment offerings, customer service options and ratings in multiple categories.
If you already have an IRA, you may be able to consolidate your 401 into this IRA, or you can create a new IRA for the money.
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Invest The Funds In Your Rollover Account
Finally, once the funds hit your rollover account, you’ll want to invest them. It’s very uncommon for 401 rollovers to transfer in-kind. Instead, the prior administrator will liquidate your investments and deposit cash into your new 401. You’ll then need to pick new investments for your retirement account.
While rolling over an existing 401 into an IRA or a new employer’s 401 is by far the most common, there may be additional options for you to consider if you qualify.
If you choose to rollover your funds, an administrator will transfer the money directly or indirectly. A direct rollover is the easiest way to avoid any issues that could result in taxes or penalties.
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.
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What Happens To My 401k When I Retire
Retirement should not be stressful, but too often it is. The flurry of critical decisions combined with a dramatic life change is enough to give even the most careful retiree a headache. Of course, we believe that education is the best medicine. To help ease the pain, we will walk through one of the most basic retiree questions of all: What should I do with my 401k when I retire?
For most retirees, the right answer is to rollover their 401k to an IRA, which is an Individual Retirement Account. As the name implies an IRA is a retirement account that is under your full ownership and control, as opposed to a companys 401k plan run by your former employer. The first advantage is straightforward having an IRA will allow you to access your funds more easily without having to go through a corporate benefits department. After all, it is your money, so why leave it behind at your company when you retire. But an IRA can have added benefits, such as increasing your investment choices, and lowering fees compared to most 401k plans.
When moving 401k money to an IRA it is important to execute a direct rollover. A rollover moves the money from one retirement plan to another and is a non-taxable event. A rollover is different from distributing the 401k balance to yourself which result in a massive tax bill, so it is important to understand this distinction.
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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Contribute To Your 401k
In conclusion, I think everyone should contribute to their 401k as much as they can while they have the income to do so. The 401k has the benefit of employer matching and tax deduction so youre saving more than you can in a taxable account. This year I will contribute quite a bit more than the $17,500 maximum in my solo 401k and I will keep it up as long as I can. The only reason why I wouldnt invest is if your 401k doesnt have employer matching AND the plan is just plain bad.
There are ways to access the IRA without having to pay the 10% penalty so I dont think you should worry too much about that. The 401k is a very useful tool whether you plan to retire early or at a normal age so please take advantage of it.
Are you maxing out your 401k contribution? If not, whats stopping you?
Beware 401 Balance Minimums
If your account balance is less than $5,000 and youve left the company, your former employer may require you to move it. In this case, consider rolling it over to your new employers plan or to an IRA.
If your previous 401 has a balance of less than $1,000, your employer has the option to cash out your accounts, according to FINRA.
Always keep track of your hard-earned 401 money and make sure that it is invested or maintained in an account that makes sense for you.
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Early Retirement Rollovers And Long
Those planning early retirement should note a few things. A person retiring at age 55 or after, but before age 59 and 1/2 could be subject to a 10% tax penalty on early withdrawals from a rollover IRA.
And bless their hearts, several states, including California, add an additional penalty. However, if those same rollover assets had been left in an employer sponsored 401k or 403b plan, for example, an ex-employee can withdraw funds without the penalties after age 55.
Obviously, ordinary income taxes would be paid on withdrawals, but without the penalties. Total taxes would probably be assessed at lower federal and state marginal income tax rates, depending upon the amounts withdrawn and other ordinary income that a person might have.
While this is discussed elsewhere, you should note that a very important Social Security and retirement tax optimization strategy for most healthy people is to delay accepting Social Security retirement payments until age 70.
At the same time to delay Social Security payments until age 70, a retiree obviously needs to have other taxable and tax-advantaged account assets to pay the bills up to age 70.
While it might seem counter-intuitive, it is usually more beneficial to spend down IRA and other traditional tax-advantaged retirement assets during those interim years.
The Affordable Care Act provides health insurance subsidies for lower income persons, and many early retirees would have relatively low income and may qualify for these subsidies.
