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When Should I Roll Over My 401k

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Keeping Your 401 With A Former Employer

Should I Roll Over My 401k?

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.

Rolling Over Your Old 401 To A New Employer

Many companies offer 401 plans, so people often end up having multiple 401s over their years in the workforce. If youd rather keep your funds in a single 401 or dont want to open an IRA, you might have the option of transferring assets from your old 401 to your new one at your current job. If not, youll need to keep an eye on how each is performing individually.

The process for this is as simple as talking to both your current and past plan providers to make sure they will both accept a transfer of assets. While the providers can offer more specific instructions, youll likely use one of the methods above to complete the rollover.

Note that not all plan providers will accept employees past 401 funds as a rollover. This is because they may not be willing to add more assets to the plan, which could overwhelm it.

Downsides To Rolling Over To A New 401

  • Potentially different rules:Your new employer will have control over the new plan and can change aspects of it, such as fees and the plan administrator.
  • Possibility of higher fees:Higher fees can cut into your earnings. Be sure to check out the fee structure before opting to roll over into the new plan.
  • Loss of investment options:The number of investment options in 401 plans have declined in recent years. This means that other retirement plans like IRAs could offer a wider range of investments that you can use to diversify. A new 401 plan may not offer the same investment choices as your original plan.

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Direct Rollover Vs Indirect Rollover: Whats The Difference

Okay, once you decide to roll money from one account to another, you have two options on how to do the transfer: a direct rollover or an indirect rollover. Spoiler alert: You always want to do the direct transfer. Heres why.

With a direct rollover, the money in one retirement accountan old 401 you had in a previous job, for exampleis transferred directly to another retirement account, like an IRA. That way, the owner of the account never touches the money, and you wont have to pay any taxes or penalties on the cash being transferred. Once its done, its done!

Indirect rollovers, on the other hand, are a bit more complicatedand needlessly risky. In an indirect rollover, instead of the money going straight into your new account, the cash goes to you first. Heres the problem with that: You have only 60 days to deposit the funds into a new retirement plan. If not, then youll get hit with taxes and penalties.

See why the direct rollover is the only way to go? Theres just no reason to take a chance on an indirect rollover that leaves you open to heavy taxes and penalties. Thats just dumb with a capital D!

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When Leaving Your Job You Can Typically Cash Out Your 401 Or Roll It Over Into A Different Retirement Account

401(k) Rollover

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:

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.

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Option : Cash Out Your 401

Lets get this out of the waythis is the worst thing you can do with your old 401.

If you withdraw the money from your 401 plan and take a direct cash distribution, youll have to pay any state and federal income taxes you owe on every last penny. And if youre under 59 1/2 years old, you can go ahead and add another 10% early withdrawal penalty to your tab.

But the worst part is youre robbing yourself of the chance to continue earning tax-free or tax-deferred growth on your investments for years, maybe decades. Its just a bad idea all around, folks.

Benefits Of A 401 To Ira Rollover

If your new employer doesnt offer a retirement plan or permit 401 rollovers, moving your money into an IRA is an alternative to leaving the assets with your former company.

More choices, more control: While your investment options will likely be limited within a 401 plan, an IRA will provide you virtually endless possibilities, including stocks, bonds, real estate investment trusts , mutual funds and more. An IRA gives much more control and freedom to invest your money how you want and when you want.

Lower fees: Because you will have myriad options for your money within an IRA, its possible that your investments will have lower fees than a 401 plan. By parking your money in passively-managed assets, like index funds and ETFs, you may reduce your expenses.

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Early Or Late Retirement

If you plan to retire early, you may benefit from keeping your money inside the 401K. Some company plans allow for penalty-free withdrawals after age 55. If your money is in an IRA, you must wait to age 59½ before you can take money out without penalties.

On the other hand, if you plan to keep working past age 72, you may be able to avoid taking Required Minimum Distributions from the 401K, whereas you cant avoid IRA RMDs, even if you delay retirement.

When Not To Transfer To An Ira

SHOULD I ROLL OVER MY 401K?

You now know some of the benefits of moving your 401 to an IRA. But control over your money isnt the only thing that matters, and you may have other priorities. Its impossible to list every potential pitfall, but here are just a few examples of when I suggest that clients might want to leave funds with their employer.

Between age 55 and 59.5

When youre at least 55 years oldbut not yet 59 1/2 years oldyou might want to leave at least some of your money in the 401 plan. 401s allow you to pull money out without penalty after age 55 . IRAs, on the other hand, require that you wait until age 59 ½ to avoid an early-withdrawal penalty of 10% on certain distributions. There are always exceptions and workarounds, but those are the basic rules. If you intend to spend your 401 savings between the ages of 55 and 59 1/2, keep this in mind before making a transfer.

Some Government Workers

If you worked for a federal, state, or local government, be sure to explore your options. Those with 457 plans can potentially avoid the early-withdrawal penalty thats commonly associated with 401 and similar plans. Plus, some public safety workers can avoid early withdrawal penalties from a retirement planincluding the TSPas early as age 50.

Roth Conversions

RMD While Working

Stable Value Offerings

Fees and Expenses

NUA Opportunities

Also Check: What Is A Self Directed 401k

Do You Have A Choice In Whether You Roll Over An Old 401

It might surprise you to learn that former employers absolutely can and often do kick people out of their prior companys 401 plan.

An employer is the one thats really paying for any fees in your retirement account, says Andrew Meadows, senior vice president at Ubiquity Retirement + Savings. So if youre below a certain balance, the law says you can be kicked out of your plan in order to reduce costs for the employer.

This is known as a force-out that, pursuant to IRS guidelines, allows employers to remove previous employees from their retirement plan if they have less than $5,000 vested in the account. While its not an issue for everyone, if you have less than $5,000 in an old employers plan, then you might have found yourself on the receiving end of a notice to take action.

If you miss the deadline to take action and roll over the money yourself, your former employer is required to move the balance to a low-cost IRA if it is more than $1,000. If its less than $1,000, they have the option to just write you a check, and you will then be penalized for an early withdrawal if you do not deposit it into a retirement savings account within 60 days.

Simplify Your Retirement Savings

That said, you can — and should — take steps to help the transfer go more smoothly. For example, you’ll want to touch base with the administrator at your new 401 plan to make sure that it actually accepts money from other plans and determine how best to go about making the transfer.

Most likely you’ll be told to have the administrator at your old plan do a trustee-to-trustee transfer so the money goes directly into your new 401. Not only is this more seamless and direct, it also gets around the hassle of your old 401 plan possibly having to withhold 20% if it simply cuts a check to you.

That would be a drag, as you would have to come up with that 20% to complete the rollover, and wait until you file your taxes for reimbursement.

You should also contact the administrator of your old plan. Start by making sure your former employer has notified your old 401’s record keeper that you’re no longer with your old employer and thus eligible to move your money.

“You’d be surprised how often that hasn’t happened,” says Sarah Houston, who handles transfers into 401s overseen by Vanguard. Then explain what you intend to do and find out what paperwork is required or, if an online transfer is an option, how to navigate that process.

Also Check: Why Rollover Old 401k To Ira

Fees May Be Lower In The 401k

While there are some expensive company retirement plans, on average IRAs tend to cost more than 401ks. There are a number of reasons for this, including management fees and commissions . Large company 401 plans usually benefit from some purchasing power which often helps bring the cost down for participants.

Drawbacks Of Keeping Your 401 With A Former Employer

InvestEd :: Why Should I Rollover My Old 401K?

There are potential drawbacks to this strategy, which may lead you to roll over your account into a new plan.

Multiple accounts to manage: Keeping your 401 with your former company means youll have more than one retirement account to track. For some investors, that may be one too many accounts to juggle.

Contributions end: While the money in your old 401 will continue to grow tax-deferred, you will no longer be able to contribute to the account.

Communication: You may be out of the loop about important updates concerning your account if information about your former employers plan is distributed via company email.

Higher fees: Its possible that fees and expenses attached to your former employers plan are higher than what is offered by your new company. Remember to check the fee disclosure notice of any plan that youre in or thinking of joining.

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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 rollover company stock that has appreciated in value.

Second, if youre afraid of bankruptcy or plan 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.

You Can Manage All Your Investments In One Place

A recent study found that the youngest baby boomers worked 12 different jobs over the course of their careers.2 Did you hear that? Twelve! Imagine how difficult it is to keep track of a dozen 401s from previous jobs.

The more scattered your retirement accounts are, the harder it is to make good decisions about your investmentsand that can affect your retirement future. Youll be able to manage your retirement funds better by having them all in one place.

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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 Jordan later decides to roll over the $8,000, but not the $2,000 withheld, she will report $2,000 as taxable income, $8,000 as a nontaxable rollover, and $2,000 as taxes paid. Jordan must also pay the 10% additional tax on early distributions on the $2,000 unless she qualifies for an exception.
  • If Jordan decides to roll over the full $10,000, she must contribute $2,000 from other sources. Jordan will report $10,000 as a nontaxable rollover and $2,000 as taxes paid.
  • 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.

    Articles About Planning For Retirement

    Should I roll over my 401k?

    In order to help you prepare for your future retirement, we’ve gathered a number of useful articles on a variety of subjects..

    Because of the inherent conflicts involved, financial advisors will almost always lean in one direction . Fiduciary advisors will explain how theyre conflicted and then discuss what makes the most sense for you. In fact, the Department of Labor now requires that advisors act as fiduciaries in all rollover recommendations. This means they must put the investors best interest over their own, meet a professional standard of care, and charge no more than reasonable fees for their services.

    At Blankinship & Foster, our advisors adhere to a fiduciary standard in all advice, including whether to roll over a 401K to an IRA. When youre ready to change jobs or thinking about retirement, contact us to discuss the decision. Well help you make an informed choice based on your unique situation, goals and objectives.

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    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.

    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.

    How to roll over your retirement plan

    Which Types Of Distributions Can I Roll Over

    IRAs: You can roll over all or part of any distribution from your IRA except:

  • A required minimum distribution or
  • A distribution of excess contributions and related earnings.
  • Retirement plans: You can roll over all or part of any distribution of your retirement plan account except:

  • Distributions of excess contributions and related earnings,
  • A distribution that is one of a series of substantially equal payments,
  • Withdrawals electing out of automatic contribution arrangements,
  • Distributions to pay for accident, health or life insurance,
  • Dividends on employer securities, or
  • S corporation allocations treated as deemed distributions.
  • Distributions that can be rolled over are called “eligible rollover distributions.” Of course, to get a distribution from a retirement plan, you have to meet the plans conditions for a distribution, such as termination of employment.

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