Should You Roll Your 401k Into An Ira

Considering A 401 Rollover Consider Your Options First

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.

Option : Roll It Into Your New 401

If your new employer offers a 401, you can possibly roll your old account into the new one. You may be required to be with the company for a certain amount of time before youre eligible to participate in their plan.

You can choose to do a Direct Rollover, whereby the administrator of your old plan transfers your account balance directly into the new plan. This only requires some paperwork.

Or, you can choose an Indirect Rollover. With this option, 20% of your account balance is withheld by the IRS as federal income tax in addition to any applicable state taxes. The balance of your old account is given to you as a check to deposit into your new 401 within 60 days. There is one catch, though. Youll need to deposit the entire amount of your old account into your new account, even the amount withheld for taxes. That means using personal cash to cover the difference and waiting until tax season to be reimbursed by the government.

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Can You Roll An Ira Into A 401

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By Justin Pritchard, CFP®

If you have multiple retirement accounts, you can often move money between them without tax consequences, and you might want to combine accounts for several reasons. The most common move is to roll from your 401 to an IRA, but its also possible to do the opposite: You can roll a pretax IRA into a 401.

There are pros and cons to everything, and that includes moving an IRA into your 401 or 403b. You might like the investment choices better, or your employers retirement plan might have less expensive investments. Simplifying is another reason to transfer IRAs to a 401: Clean up those old accounts instead of spending mental energy and time to keep track of multiple accounts.

Tips For Retirement Investing

• Consider finding a financial advisor to steer you in the right direction in terms of savings and investments. Finding a qualified financial advisor doesnt have to be hard. SmartAssets free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If youre ready to find an advisor who can help you achieve your financial goals, get started now.
• When youre starting to plan for retirement, you should consider the tax laws of the state you live in. Some have retirement tax laws that are very friendly for retirees, but others dont. Knowing what the laws apply to your state, or to a state you hope to move to, is key to getting ahead on retirement planning.

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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

Cons

• 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.

What Are Your Other Options

You might want to think about changing the beneficiaries on your plan to align with your estate planning goals. That could be a better option than changing the actual owner of your IRA or 401 from you to your trust.

You might want to work with an estate planner or lawyer to accomplish this. It all depends on the size of your IRA or 401 and the details of your estate plan.

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Keeping The Current 401 Plan

If your former employer allows you to keep your funds in its 401 after you leave, this may be a good option, but only in certain situations. The primary one is if your new employer doesn’t offer a 401 or offers one that’s less substantially less advantageous. For example, if the old plan has investment options you cant get in a new plan.

Additional advantages to keeping your 401 with your former employer include:

• Maintaining performance:If your 401 plan account has done well for you, substantially outperforming the markets over time, then stick with a winner. The funds are obviously doing something right.
• Special tax advantages: If you leave your job in or after the year you reach age 55 and think you’ll start withdrawing funds before turning 59½ the withdrawals will be penalty-free.
• Legal protection: In case of bankruptcy or lawsuits, 401s are subject to protection from creditors by federal law. IRAs are less well-shielded it depends on state laws.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 does protect up to $1.25 million in traditional or Roth IRA assets against bankruptcy. But protection against other types of judgments varies.

If you are going to be self-employed, you might want to stick to the old plan, too. It’s certainly the path of least resistance. But bear in mind, your investment options with the 401 are more limited than in an IRA, cumbersome as it might be to set one up.

What Is A Rollover Ira

A rollover IRA is identical to a Traditional IRAor Roth IRA in the case of rolling over Roth 401 fundsexcept that the source of the money is not annual contributions. Instead, the money that goes into a rollover IRA is money from a previous retirement plan, such as a 401 plan. If you do not already have an IRA, you may open one for the purpose of rolling over your 401 funds without making any additional annual contributions. On the other hand, if you do have an IRA, you are permitted to roll over your 401 into that existing contributory IRA account.

It is important to note, however, that you may not combine traditional IRA and 401 funds with Roth IRA and Roth 401 funds.

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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.

Deposit Your Money Into Your Fidelity Account

You can have the money sent directly to us to deposit into your account, or deposit it yourself.

Important: The check should be made payable to Fidelity Management Trust Company , FBO . Be sure to ask your former plan administrator to include your IRA account number on the check.

Please note: When a rollover check is made payable directly to you, you must deposit the money into your IRA within 60 days of receiving the check to avoid income taxes and a possible early withdrawal penalty.

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Ira Rollover Benefit : Lower Fees

In addition to limited investment options, some employer-sponsored 401 plans have high administrative fees. These fees are not enough to make contributing to the plan a bad deal, but it makes more sense to keep those retirement assets growing in a similarly tax-advantaged option. IRAs tend to have lower fees, if any, depending on where and how you open the accountsay, a banking institution or online bank, or through a financial advisor.

When To Roll Over Your 401 To An Ira

Rolling over your 401 to an IRA is possible only if you’re leaving your current employer or your employer is discontinuing your 401 plan. It is an alternative to:

• Leave your money invested in your existing 401
• Rollover to your new employer’s 401
• Withdrawal from your 401, which would trigger a 10% penalty if you aren’t 59 1/2 or older

A rollover or IRA) does not have tax consequences. This would not be the case if you do a rollover to a Roth IRA.

Rolling over a 401 to an IRA provides you with the opportunity to choose which brokerage you want to hold your retirement funds. It may be the right choice if:

• Your new employer doesn’t offer a 401 plan
• You cannot keep your money invested in your current workplace plan because your plan is being discontinued or your 401 administration won’t allow you to stay invested for some other reason
• Your new employer’s 401 plan charges high fees, offers limited investments, or has other drawbacks
• You’d prefer a wider choice of investment options

However, there are some downsides to consider:

• While 401 loans allow you to borrow against your retirement funds, no such option exists with an IRA.
• Transferring company stock can be complicated account, read up on an “NUA strategy” that could save you a lot of money.)

If these downsides aren’t deal breakers for you, the next step is figuring out how to roll over your 401 to an IRA.

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Net Unrealized Appreciation And Company Stock In A 401

If you have company stock in a 401, it could save you significant money on taxes to transfer those shares into a taxable brokerage account to take advantage of net unrealized appreciation, or NUA. NUA is the difference between what you paid for company stock in a 401 and its value now.

For example, if you paid $20,000 for company stock and its now worth $100,000, the NUA is $80,000.

The benefit of the NUA approach is that it helps you avoid paying ordinary income tax on these distributions of your own companys stock from your retirement account. That can be up to 37 percent, which is now the highest tax bracket, says Landsberg.

Instead, youll enjoy capital gains tax treatment, which even at the highest tax bracket is only 20 percent, on any appreciation. High earners, however, will be subject to a bonus 3.8 percent net investment income tax. And an NUA may be subject to a 10 percent early withdrawal tax if you move funds prior to age 59 1/2.

Landsberg says NUA makes the most sense when the difference in tax rates is higher.

Net unrealized appreciation is a very powerful tool, if used correctly, Landsberg says. So you can get creative and potentially have a pretty nice windfall if you use the NUA rules correctly.

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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Rolling Over Your 401 To An Ira

You have the most control and the most choice if you own an IRA. Unless you work for a company with a very high-quality planthese are usually the big, Fortune 500 firmsIRAs typically offer a much wider array of investment options than 401s.

Some 401 plans have only a half dozen funds to choose from, and some companies strongly encourage participants to invest heavily in the company’s stock. Many 401 plans are also funded with variable annuity contracts that provide a layer of insurance protection for the assets in the plan at a cost to the participants that often run as much as 3% per year. Depending on which custodian and which investments you choose, IRA fees tend to run cheaper.

With a small handful of exceptions, IRAs allow virtually any type of asset: stocks, bonds, certificates of deposit , mutual funds, exchange traded funds, real estate investment trusts , and annuities. If you’re willing to set up a self-directed IRA, even some alternative investments like oil and gas leases, physical property, and commodities can be purchased within these accounts.

If you opt for an IRA, then your second decision is whether to open a traditional IRA or a Roth IRA. Basically, the choice is between paying income taxes now or later.

How Do Living Trusts Work

A living trust is a legal entity set up to hold property for eventual distribution to your beneficiaries. You can create one during your lifetime it can be either revocable or irrevocable. In either case, you would transfer ownership of your assets into the trust’s name after it’s created, which more or less makes your trust the new, current owner of the assets.

Revocable trusts offer the most flexibility because you can name yourself as trustee. That means you manage the property and income produced by the trust during your lifetime.

You can name a successor trustee to take over should you become incapacitated, or upon your death. The successor trustee would then transfer ownership of the trust’s assets to your beneficiaries according to your trust documents.

Forming an irrevocable trust requires that you forever give up all control over the assets you place into the trust’s name. Unlike a revocable trust, which you can dissolve if you see fit, you give up this right when you form an irrevocable trust. You must name someone else as trustee.

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Choose Which Type Of Ira Account To Open

A 401 rollover to an IRA may give you more investment options and lower fees than your old 401 had.

• If you do a rollover to a Roth IRA, youll owe taxes on the rolled amount.

• If you do a rollover to a traditional IRA, the taxes are deferred.

• If you do a rollover from a Roth 401, you won’t incur taxes if you roll to a Roth IRA.

Your Employer Retirement Account Options

It can be reassuring to know that you still have access to your contributions and those vested employer-matching contributions. Whenever you terminate employment after participating in a workplace retirement plan, you will have several options for what to do with the vested amount in that account. In fact, there are four options you should consider:

Cashing out of your former employer’s retirement plan is almost never advisable. It is one of the top retirement planning mistakes to avoid. Though leaving your money in your former employer’s plan or rolling it over to a new employer plan are both fine options, don’t disregard the opportunity to roll your funds into a rollover IRA. A rollover IRA comes with its own set of strategic benefits, and when executed properly, it ensures that you won’t trigger any negative tax consequences.

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