Advantages Of Rolling Over Your 401
1. You can consolidate your 401 accounts
Especially if you change jobs often, you might find yourself with many 401 accounts scattered around. The more accounts you have, the harder it may be to actively make decisions. By having your retirement funds all in one place, you may be able to manage them more carefully.
2. Youll have more investment choices in an IRA
With your 401, you are restricted to the investment and account options that are offered in that plan. An IRA can give you a more diverse option of items to invest in. In an IRA you may be able to invest in individual stocks, bonds or other vehicles that may not be available in your 401.
You cant add to the 401 at your previous employer. But if you roll this money over into a traditional IRA, you can add to that traditional IRA over time, up to the annual maximum. Youll have to follow the IRA contribution guidelines.
3. Youll have the choice to bring the account anywhere youd like
With an IRA, you can take your money with you to any advisor, if you already have a financial advisor or financial planner that you work with, for example. Or maybe you already have a brokerage where some of your money is being managed, and you want all your funds there.
Traditional Ira Vs Roth Ira
Like traditional 401 distributions, withdrawals from a traditional IRA are subject to your normal income tax rate in the year when you take the distribution.
Withdrawals from Roth IRAs, on the other hand, are completely tax free if they are taken after you reach age 59½ . However, if you decide to roll over the assets in a traditional 401 to a Roth IRA, you will owe income tax on the full amount of the rolloverwith Roth IRAs, you pay taxes up front.
Traditional IRAs are subject to the same RMD regulations as 401s and other employer-sponsored retirement plans. However, there is no RMD requirement for a Roth IRA.
Cash Out Your Old Account
Think long and hard before you do this. Its almost never the best choiceand it triggers a big tax bill!
Advantage
- Its money you can use to pay bills or for another purpose. Also, if you left your job during or after the calendar year in which you turned 55, you wont owe an early-withdrawal penalty.
Disadvantages
- Youll owe income taxes on your money. If youre in a 30% combined federal and state tax bracket, for example, and cash out a $50,000 account, youll have only $35,000 left after taxes.
- You will destroy your retirement nest egg.
The bottom line: For most people, the best option is to move your savings into an IRA, which gives you the most freedom and control over your money.
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Roll Your Money Into An Ira
What if your new company doesnt offer a 401 plan? Or perhaps you want more control over your investments and a wider array of asset options. If so, rolling your 401 into an IRA may suit your needs.
After opening an IRA with a bank or brokerage firm, youll use a direct rollover or 60-day rollover to move the money from your 401 into the IRA. By rolling your retirement savings into an IRA, youll assume control over your investments and may have a broader range of options.
While contributions to a 401 or traditional IRA are taxed when money is pulled out of the account, a Roth IRA allows your money to grow tax-free because the contributions are made after being taxed. Its important to note that some 401 plans wont allow you to roll over your money directly into a Roth IRA. If thats the case, you can move the funds into a traditional IRA and then convert it to a Roth account, but a financial advisor can help you through this process.
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How To Rollover Your 401
Once youve decided to do a 401 rollover, the question naturally follows: how do I roll over my 401? The most common method is called a direct rollover. With a direct rollover, your former 401 provider will send your money to your new IRA provider. There will usually be some paperwork to complete, but the details vary between 401 providers. You may also have to receive and forward a paper check from your 401 provider to your new IRA provider. If this feels complicated or youd just like some help, you may want to consider a service that handles your rollover for you for free.
Rollover To Another 401
If you value the simplicity of having all your retirement funds in one place, are looking to minimize account maintenance fees or want to prepare yourself to take advantage of the Rule of 55, a 401-to-401 rollover can be a good choice. By rolling over an old 401 into a plan with your new employer, you can keep everything in one place. Evaluate investment options carefully, though, to make sure there arenât high fees and that the investments available work for you.
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Move Your 401 To Your New Employer
If your new employer has a retirement plan, you can ask your former employer to automatically transfer your money to the new 401. Direct transfers may take a few days or weeks, depending on the 401 plan.
You may also opt to receive a check with your 401 balance so that you can deposit it to your new 401. In this case, you have 60 days to deposit the check into the new plan. Any delays past the 60-day deadline attract an income tax and penalty on early withdrawals.
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.
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Benefits Of A 401 Rollover
Rolling over your 401 to an IRA before you retire has multiple benefits, especially as you near or enter your retirement years:
1. Consolidate your funds to know where you stand – It helps you know where you stand financially by seeing your consolidated retirement savings in a single account. This way, you can determine how long your funds will last and what kind of lifestyle they can support in retirement.
2. Ease of withdrawing to support your lifestyle when youre retired – When its time to withdraw your funds during retirement, its a lot easier if your money is consolidated in an IRA. If you have multiple 401, youll have to manage many accounts carefully to ensure your money lasts the entirety of your retirement.
3. More Investment options – You will most likely have more investment options in an IRA than in your 401, allowing you to customize your portfolio to match your stage in life and adjust over time.
4. Greater visibility and control over fees – You can choose an IRA provider with transparent fees so you know how much youll pay, unlike a 401 where you dont have any control over the provider fees.
What Is A 401 Rollover
There are many ways to save for retirement, and an employer-sponsored plan like a 401 is one of the most common. But when you leave the employer that sponsored the 401, youll likely choose to roll over the funds from that account. You might choose to roll it into your new employers 401 plan, if one exists. You might also choose to put it into an individual retirement account , which can provide more control and flexibility.
Just like IRAs, 401 plans come in two forms: traditional and Roth. In most cases, someone directing a 401 rollover will transfer their funds to a new account that features the same tax benefits. So if you have a traditional 401, youll likely roll its assets over to a traditional IRA or 401. The same is generally true for Roth accounts.
But nothing in the IRS rules says you have to go with the same type of account. Instead, you could roll over money from a traditional 401 to a Roth IRA. However, you would then owe taxes on that money for the current tax year, as Roth accounts are funded with post-tax dollars. Because of this, you cannot do the reverse and roll over money from a Roth 401 to a traditional IRA.
You could also complete a 60-day rollover. This involves the custodian of your 401 making a check out to you in the amount of your account balance But since the money will technically pass through your hands, there are some unfavorable tax implications, including a 20% tax withholding by your employer.
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Rollover To A Traditional Ira
Transferring funds between a traditional 401 and a traditional IRA or between a Roth 401 and a Roth IRA is relatively straightforward. In many cases, you can do a direct rollover, also called a trustee-to-trustee transfer. This involves your 401 provider wiring funds directly to your new IRA provider. Alternatively, your 401 provider may send you a check that you then deposit into your new IRA.
Look out for any taxes your provider may have preemptively deducted. You shouldnât owe any taxes or penalties as long as you deposit money in a tax-advantaged retirement account within 60 days.
Roll Over Your Money To A New 401 Plan If This Option Is Available
If you’re starting a new job, moving your retirement savings to your new employer’s plan could be an option. A new 401 plan may offer benefits similar to those in your former employer’s plan. Depending on your circumstances, if you roll over your money from your old 401 to a new one, you’ll be able to keep your retirement savings all in one place. Doing this can make sense if you prefer your new plan’s features, costs, and investment options.
- Pros
-
- Any earnings accrue tax-deferred.1
- You may be able to borrow against the new 401 account if plan loans are available.
- Under federal law, assets in a 401 are typically protected from claims by creditors.
- You may have access to investment choices, loans, distribution options, and other services and features in your new 401 that are not available in your former employer’s 401 or an IRA.
- The new 401 may have lower administrative and/or investment fees and expenses than your former employer’s 401 or an IRA.
- Required minimum distributions may be delayed beyond age 72 if you’re still working.
- Cons
-
- You may have a limited range of investment choices in the new 401.
- Fees and expenses could be higher than they were for your former employer’s 401 or an IRA.
- Rolling over company stock may have negative tax implications.
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Access More Investment Choices
In a 401 plan, youâre limited to the investment choices picked by your employer, usually a selection of mutual funds. If you roll over your 401 to an IRA, you may be able to expand your investment choices to include a broader range of funds, exchange traded funds or even individual stocks and bonds. Youâll get more control over your portfolio, especially if you use a self-directed IRA, which allows you to invest money into more unorthodox assets like real estate.
What To Do With Your 401 Money When You Retire
By Rodney Brooks, Next Avenue Contributor
Billions of dollars are at stake as boomers decide what to do with the $5.3 trillion theyve invested in company-sponsored 401 plans when they retire. Leave the money where it is? Roll it over to an Individual Retirement Account at a financial firm? For many, its a head-scratcher.
The topic is especially timely with the Wall Street Journal recently reporting that the U.S. Department of Labor is looking into whether Wells Fargo has been pushing retiring clients to move their 401 money into more expensive IRAs at the bank.
Financial advisers say there are pros and cons to leaving your 401 in place and to rolling it over into an IRA.
Also on Forbes:
It depends on the individual needs of the employee and the quality of the plan, says Harris Nydick co-founder of CFS Investment Advisory Services in Totowa, N.J., and author of Common Financial Sense, Simple Strategies for Successful 401 and 403 Retirement Plan Investing.
There is not a one-size-fits-all when it comes to making this decision, says Dan Houston, chairman, president and CEO of Principal Financial Group in Des Moines,
5 Reasons to Leave your 401 With Your Company
Here are five reasons to consider leaving your 401 with your company as 22% of 401 owners did when exiting, according to an Ameritrade survey rather than moving it to a Rollover IRA when you retire:
5 Reasons to Roll Over Your 401 Into an IRA
What Not to Do With Your 401
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Reasons You May Want To Wait To Roll Over Your 401
- Temporary ban on contributions. Some plan sponsors impose a temporary ban on further 401 contributions for employees who withdraw funds before leaving the company. You’ll want to determine if the gap in contributions will significantly impact your retirement savings.
- Early retirement. Most 401s allow penalty-free withdrawals after age 55 for early retirees. With an IRA, you must wait until 59 ½ to avoid paying a 10% penalty.
- Increased fees. IRA investors may pay more fees than they would in employer-sponsored plans. One reason: The range of more sophisticated investment options you may choose can be more expensive than 401 investments. Your advisor can help identify what extra cost a rollover may incur and if the benefits of the rollover justify those additional costs.
- Can take loans out. Your 401 may permit you to take out a loan from the account, but this is typically only for active employees. And you may have to pay in full any outstanding loan balances when you leave the company. You cannot take loans from IRAs.
Take Caution With Indirect Rollovers
Rollovers may be done as direct or indirect, but they are not managed the same.
Direct – A direct rollover is where the funds are transferred directly from one retirement account to another as the owner you never touch the funds. Doing a direct rollover avoids this negative consequence that may come with an indirect rollover.
Indirect â As the owner you can receive a distribution of your account balance from the plan instead of arranging for a direct rollover. This might not be the best idea. If you take a distribution, the plan administrator typically withholds 20% of the distributable amount for federal income taxes. The 20% is returned in the form of a tax credit in the year the rollover process was completed. When you do this indirect rollover, you can increase the rollover amount, from your own funds, equal to the 20% withholding amount. If you roll over the amount of the check you receive without adding that 20% back, then the amount withheld will be treated as a taxable distribution. You will generally have to pay income taxes on that amount as well as a 10% penalty tax if you are younger than 59 1/2. Also, when you take the cash directly, the IRS only allows you 60 days from the date of receipt of the funds to rollover the funds to another plan or IRA.
Additional rollover caveats
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