Monday, July 15, 2024

When Should You Rollover Your 401k

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Decide What Kind Of Account You Want

Should I Rollover My 401k

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.

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.

Roll The Funds From Old 401 Plans To A New Ira

This is the most popular option for many reasons . By rolling over old 401s into one new IRA, you will most likely provide yourself with more options and control over your investments.

For the most part, all three of these options are identical from a tax perspective. Whether you leave your plan where it is, move from 401 to 401, or do a rollover into an IRA, there are no tax consequences. Many people falsely believe that rollovers trigger taxes, but thats not true because youre rolling over into a similar type of account. The only difference is the 401 is sponsored by your employer and the IRA is in your name and held outside of your employer.

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How And Why To Transfer Your 401 To An Ira

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By Justin Pritchard, CFP® in Montrose, CO

When you change jobs or retire, you have several options for the money in your 401. You can typically transfer that money to an IRA, leave it in the plan, move it to your new jobs retirement plan, or cash out. In many cases, its smart to move your savings into an IRA. Well cover the pros and cons here so you can decide whats best.

The process can be confusing and intimidating, so its easy to do nothing. But that might result in leaving your savings with an employer that you no longer have any connection to, and one you might even dislike or distrust.

Key takeaway:Read more below, or listen to the explanation .

Recommended Reading: How Do You Rollover Your 401k To A New Employer

Its A Lot To Keep Track Of

Why You Should Move Your 401(k) Into an IRA

It might sound like no big deal but even managing the passwords on multiple accounts can be a pain. With a bunch of retirement accounts , it becomes more of a task to figure out how your money is allocated. For example, figuring out how much you have in bonds vs. stocks takes more time.

When you have it all in one place, its usually pretty quick to do a calculation on your own. Sometimes, theres a handy little chart for us to reference.

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Should I Rollover My 401 To An Ira

The 5 key factors to determine whether you should roll your employer sponsored retirement plan to an IRA are:

  • Investment fees,
  • Benefits and risks of aggregating accounts,
  • Different age related benefits and restrictions of different account types,
  • Asset Protection.
  • Either leaving your money in your 401 or rolling it over to an IRA could be the correct choice for you. I will walk you through my decision process to help you make the best decision for yourself.

    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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    Advantages And Disadvantages Of A 401 Rollover

    One primary advantage of a 401 rollover is that you have control over the funds for the short term and can use them before completing your rollover. For example, if you need funds for a specific purpose , you can use the distribution and not incur any income tax as long as you come up with other funds to complete the rollover within 60 days.

    A primary disadvantage is that the distribution is subject to the automatic 20% withholding tax. If you take a distribution and then decide to make a full rollover, youll have to come up with the 20% amount from your own pocket to complete the rollover youll recoup this amount when you file your tax return.

    For example, say you have $50,000 in your 401 and want to take a complete distribution. The plan will send you $40,000 ). To make a full rollover so that you wont owe any current tax on the distribution, youll have to use the $40,000 you received plus $10,000 of your own money to complete the rollover. When you file your return, the $10,000 withheld is a tax credit that you can receive as a refund. Another drawback is that its all too easy to miss the 60-day rollover deadline, despite good intentions.

    If you do this and cant get an extension from the IRS, youll owe income tax on the distribution. Whats more, if youre under the age of 59½, youll owe a 10% early distribution penalty unless you can show that you used the funds for a purpose thats exempt from the penalty .

    How We Can Help

    Should You Rollover Your 401(k)?

    If you have a 401 and are exploring what options make the most sense for you, we invite you to meet with one of our financial advisors to discuss your situation. He or she will take the time to explain the options available to you, answer any questions you may have and together you can determine what’s best for you.

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    Why You Should Roll Over Your 401 To An Ira

    When you leave your job, you need to consider whether you should roll over your 401 to a new employer or an IRA. The reasons why you should roll over your 401: more cost control, more investment options, the potential for professional advice, fewer rules, consolidation, and control over taxes.

    Unless you have an incredible 401 plan featuring very cheap options, you are better off with an IRA. Remember, the best part of a 401 plan is the match. After you change jobs, your old employer wont continue to match your contribution, so you are better off moving your retirement savings elsewhere.

    Pros And Cons Of Rolling Over 401k To Ira

    Learn the pluses and the minuses of getting all of your IRA and 401k ducks in a row.

    According to the Bureau of Labor Statistics, on average, individuals between the ages of 18 and 52 may change jobs as frequently as 12 times. Some of those jobs probably came with some type of employer sponsored retirement plan such as 401k or an IRA account . When switching jobs, many people choose to rollover any accounts to their new employers plan rather than taking them as a withdrawal. When you roll over a retirement plan distribution, penalties and tax are generally deferred. So let’s look at a few of the pros and cons of consolidating them into one IRA with one institution.

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    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.

    Big Decisions Related To Smaller Rollovers

    Should You Rollover Your Old 401(k) Plan?

    The size of your rollover may limit the types of financial advisors that can help you. If your balance is under $100,000, you may find that the account is too small for many of the professional, fee-only investment advisory firms or top stockbrokers.

    In such cases, you may need to consider whether working directly with a mutual fund company or seeking out a local advisor makes sense. Youll want to check out their fees and commissions, and whether they will actively manage your account or simply invest it into some funds.

    Ideally, youll probably want a fee-based arrangement where there are no large up-front or back-end charges. That way, your advisor has an incentive to grow your account. You can always monitor the results and their services and move elsewhere if necessary.

    If the advisors you find are recommending that you pay a commission to get into some new investments, check out their track record versus the results of the plan options you have with the 401. For mutual fund comparisons, check out for their research. Some 401 plans have good options that may compete well with funds that a commission-based advisor may offer.

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    Please Do Not Do An Indirect Rollover

    You do NOT want to have the check made payable to you. It may seem counterintuitive, as it is your money. However, if the check is made payable to you, the IRS could treat this as a distribution to you.

    Your employer is required to withhold 20% for taxes automatically. On top of that, you have 60 days to put the money back into IRA or 401. So, if you want your account to maintain at least the same level of value, you would need to come up with that 20% withholding. The 20% is withheld for taxes and will NOT roll over.

    If you cannot come up with that 20% withholding, the IRS will count that as a withdrawal, which might carry an additional 10% penalty. Avoid this potentially costly and annoying mistake by paying attention to the details and conducting a direct rollover.

    As you can see, an indirect rollover is potentially expensive and not helpful to you. Please avoid doing it. Even if you get that 20% withholding back, it takes forever, and you miss out on participating in the market.

    Source: Internal Revenue Service

    Why Transfer Your 401 To An Ira

    Why would you move savings from an old 401 plan to an IRA? The main reason is to keep control of your money. In an IRA, you get to decide what happens with the funds: You choose where to invest and how much you pay in fees, and you dont need anybodys permission to take money out of the account.

    More Control

    Cost and providers: In your 401, your employer controls almost everything. Employers choose vendors for the plan, which determines the investment lineup available. Those might not be investments you like, and they might be more expensive than you want. If you want to practice socially-responsible investing, the 401 may lack options for that.

    Timing: 401 plans also require extra steps when you want to withdraw funds: An administrator needs to verify that you are eligible to access your money before youre allowed to take a distribution. Plus, some 401 plans dont allow partial withdrawalsyou might need to take your full balance.

    Easy Withdrawals

    If you need access to your 401 savings for any reason, its easier when the money is in an IRA. In most cases, you call your IRA provider or request a withdrawal online. Depending on what you own in your account, the funds might go out as soon as the next business day. But 401 plans might need a few extra days for everybody to sign off on the distribution.

    Complicated Situations

    Control Tax Withholding

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    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.

    When Can I Roll My 401 Into An Ira

    Should You Rollover Your 401k Into an IRA? (

    When leaving an employer, either to switch jobs or retire, you can leave your investments in your 401. Alternatively, you have the option to roll over the funds to an IRA with the brokerage firm of your choice.

    There is no time limit to initiate the rollover. There are various ways to transfer money from your 401 to your IRA.

    If the funds are distributed directly to you, there is a 60 day time window to deposit the funds into an IRA. You can find the complete IRS rules governing Rollovers of Retirement Plan and IRA Distributions here.

    Some retirement plans allow in-service rollovers, rolling over your work sponsored retirement account while you are still employed at the company.

    Not all plans allow in-service rollovers. Those that do often have restrictions related to your age or other factors like the length of time youve contributed to the plan. Check your individual plan documents if you are interested in an in-service rollover.

    Read Also: How To Rollover My 401k To New Employer

    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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