Why You Should Roll Over Your 401 Into An Ira As Soon As Possible
By Eva Sadej
Blueleafs position: Roll over your old 401 into an IRA as soon as possible. IRA fees are both more transparent and lower than 401 fees, you have a much wider range of investment options, and its much easier to monitor your investments in an IRA than in an old 401.
Setting up a 401 is a piece of cake. You check off a box on a form at your company, and instantly theres money taken out of every paycheck and deposited into a retirement account in your name. You can determine the amount you want to put away, and many companies even have a program where they match your contribution up to a certain percentage . Sounds great, right? You check a box, and youre on your way to a more comfortable retirement: the very definition of a set-it and forget-it system.
Theres a simple, and relatively painless, solution to this missing money issue. Roll your money over into an IRA either before you leave the company or shortly thereafter. Your IRA then becomes attached to you and you alone, not to your company or some other entity that you might not know how to contact. This way, you always know where your money is and who to contact in regards to your investment mix.
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.
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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.
What to look out for
Lower Invesment Fees And Costs
Another reason you should roll over your 401 to an IRA is to have better cost control. A 401 plan has a set fund structure that can potentially carry higher than average fees, eating into your portfolios return. Furthermore, plan administration and consultant fees are in addition to the plans total cost.
Rolling your 401 into an IRA would allow you to take advantage of dirt-cheap mutual funds or even trade individual stocks and bonds for free. You would also avoid administrative costs, significantly lowering your portfolios fees, which can add up over your career.
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Option : Cashing Out Your 401
While withdrawing your money is an option, in most circumstances, it means those funds will not be there when you need them in retirement. In addition, cashing out your 401 generally means you’ll have to pay taxes on the withdrawal, and there’s typically an additional 10% tax penalty if you’re younger than 59½, unless you left your employer in the calendar year you turned 55 or older.
Net unrealized appreciation: special considerations for employer stockIf you own stock in your former employer and that stock has increased in value from your original investment, you may be able to receive special tax treatment on these securities. This is referred to as net unrealized appreciation . If you roll the employer stock into a traditional or Roth IRA or move it to your new employers plan, the ability to use the NUA strategy is lost. NUA rules are complex. If you’re considering NUA, we suggest consulting with a tax professional prior to making any decisions on distributions from your existing plan.
Should I roll over my 401?The decision about whether to roll over your 401 is dependent on your individual situation. A financial advisor will work with you to help identify your goals and determine what’s important to you. By understanding your investment personality, he or she will be able to advise if rolling over your 401 is the best option for you.
Transferring Your 401 To Your Bank Account
You can also skip the IRA and just transfer your 401 savings to a bank account. For example, you might prefer to move funds directly to a checking or savings account with your bank or credit union. Thats typically an option when you stop working, but be aware that moving money to your checking or savings account may be considered a taxable distribution. As a result, you could owe income taxes, additional penalty taxes, and other complications could arise.
IRA first? If you need to spend all of the money soon, transferring from your 401 to a bank account could make sense. But theres another option: Move the funds to an IRA, and then transfer only what you need to your bank account. The transfer to an IRA is generally not a taxable event, and banks often offer IRAs, although the investment options may be limited. If you only need to spend a portion of your savings, you can leave the rest of your retirement money in the IRA, and you only pay taxes on the amount you distribute .
Again, moving funds directly to a checking or savings account typically means you pay 20% mandatory tax withholding. That might be more than you need or want. Most IRAs, even if theyre not at your bank, allow you to establish an electronic link and transfer funds to your bank easily.
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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.
Here’s How Retirement Investors Should Consider Price When Rolling Over Accounts
One Industry Focus: Financials listener recently asked an interesting question about 401 rollovers: If you want to roll over your account, but the market has fallen rapidly, are you better off waiting for a rebound? In this clip, host Jason Moser and Fool.com contributor Matt Frankel, CFP, discuss why this shouldn’t be a concern.
To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. A full transcript follows the video.
This video was recorded on June 3, 2019.
Jason Moser: Let’s jump into the second question here from Joseph Higgins. Joseph says, “I switched jobs recently. In trying to roll over an old 401 from the time of request until I actually received the forms in the mail, my balance dropped 5%. Would you wait until the market rebounds? Or does it not matter since I’ll be rebuying at lower prices anyway?”
Matt, as I said at the top of the show, you’re a certified financial planner. You run across this type of thing, I think, often in your job. What do you think about Joe’s question there?
Joe, I hope that’s helpful. Good question! Certainly, I don’t think there’s any one cut-and-dry answer there. But hopefully, we’ve given you a couple of extra things to think about, ways to look at it.
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Why You Should Roll Over Your 401 From A Former Employer Today
May 18, 2020 | ROBS
After years of working for an employer that offers a sponsored 401 plan, youve probably amassed a sizable amount in your retirement account. Once you leave that company, however, those funds remain in the account tied to that former employer that is, until you decide what to do with them.
You have a few options for what to do with this 401, but the choice that gives you the most freedom to control your nest egg is rolling the funds over into a new retirement account designed for your future. If you have a 401 through a former employer that you havent made a move on yet, consider these rollover options and why they matter.
401 Rollover Options
Once youve made the decision to roll over a 401 from an existing employer, you have even more options on where to put your savings:
Benefits of 401 Rollovers
Regardless of where you move your 401, deciding to roll it over to begin with comes with a number of benefits namely ease of control and flexibility.
Rolling over your former 401 gives you the opportunity to consolidate your retirement funds, rather than having multiple retirement accounts through different administrators. This makes it easier to keep track of your retirement savings. Additionally, with all your funds in one place, youll have greater control over how to invest them.
Keep Your 401 With Your Previous Employer
In this instance, you wont change a thing. Just make sure that you actively monitor your investments in the plan for performance and remain aware of any significant changes that occur.
If you really like your current investment options and are paying low fees on the investments, this might be the right choice for you.
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Your Current Plan Is Sufficient
One of the main criticisms of 401 plans is that many of them come with unnecessarily high fees and hidden costs. Now more than ever before, this is less likely to be the case, but still does hold true in some situations.
An exceedingly simple 401 plan with minimal costs and a broad-enough investment menu is really all you need. So as long as your plan meets that criteria, there’s really no urgency to move it.
A balanced strategy you might consider is to have a 401 plan, contribute at least up to the employer match if there is one, and max out your Roth IRA every year. This way, you’ll take advantage of the benefits that your 401 plan offers while still maintaining an independent, tax-free IRA on your own terms.
Why To Rollover Your 401k
A Wealth Advisor at Steel Peak Wealth Management that explains investing and finance in plain English.
Rolling over a 401K is the process of moving your retirement savings from an employer controlled account into an IRA. This is a move that I recommend to anyone that has switched employers, retired, or has reached age 59 ½ and is still working. You are eligible to roll over a 401K if you no longer work at the firm that provided your 401K, if you have retired from the firm that provided your 401K, or if you have reached the age of 59 ½ at your current employer*. Below are 5 reasons it is smart to rollover your 401K into an IRA.
1. There is no downside
A 401K to IRA transfer is done through a check from the 401K provider directly into your IRA account. Though assets would have to be sold out of the 401K in order to receive a check, there is no tax event since both account types are tax deferred.
2. Greater transparency
Unfortunately, 401K plans have a lot of hidden charges. Investors don’t know how much they are actually paying for their 401K, as it simply gets cut out of their overall performance. This is a known problem, and the department of labor has recently come out with a set of fiduciary rules for 401K plan providers in order to make them more transparent. However, it does not look like these rules will be put into place for another two years. With an IRA, the investors can have a clear picture of their investments with complete access to their fee structure.
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Pros Of Rolling Over 401 To Ira
Once you leave your former employerâs workplace, you no longer get an employer match on your 401 contribution nor are you required to continue making contributions to your former employerâs retirement plan. This is why rolling over your funds to IRA is the best bet to grow your retirement savings.
Here are some reasons why you should rollover your 401 savings to an IRA:
Roll It Over To An Ira
This option makes sense if you want to roll over your 401 and you want to avoid a taxable event. If you have an existing IRA, you may be able to consolidate all of your IRAs in one place. And an IRA gives you many investment options, including low-cost mutual funds and ETFs.
There are plenty of mutual fund companies and brokerages that offer no-load mutual funds and commission-free ETFs, says Greg McBride, CFA, Bankrate chief financial analyst.
You also want to just make sure that youre satisfying any account minimums so that you dont get dinged for an account maintenance fee for having a low balance, McBride says. Index funds will have the lowest expense ratios. So theres a way that you can really cut out a lot of the unnecessary fees.
Check with your IRA institution first to ensure that it will accept the kind of rollover that you would like to make.
The letter of the law says it is OK . But in practice, your 401 plan may not allow it, says Michael Landsberg, CPA/PFS, member of the American Institute of CPAs Personal Financial Planning Executive Committee.
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A Choice That Deserves Thought
The decision to roll over your 401 is, like most things, a personal one. Be sure to make the decision against the backdrop of your entire financial and tax picture, and don’t be afraid to enlist help in the form of a fee-only financial planner if things get complicated. Good financial planning takes time, effort, and consideration, so be patient with yourself and the results will follow.
Potential For Roth Conversion
The opportunity for a Roth conversion is another excellent reason to roll your 401 into an IRA. With a traditional IRA or 401, you avoid paying taxes upfront but pay income taxes on the withdrawal. A Roth IRA is the exact opposite, as you contribute after you pay taxes, but withdrawals are tax-free.
If you have a long time until retirement or expect a higher tax rate in retirement, a Roth IRA may be an excellent idea for you. To do this, you will most likely need to roll over to a traditional IRA first. Then, when it is appropriate, convert to a Roth IRA account.
A Roth IRA conversion will create an income tax liability against the conversion amount. For that reason, professionals highly recommend that you coordinate with a financial advisor or tax professional before initiating a Roth conversion.
A powerful reason to roll over your 401 to an IRA is that you can control when you pay your taxes with a Roth conversion. There are many reasons millennials should use a Roth IRA to reach their financial goals.
Source: Internal Revenue Service
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Roll Your Old 401 Into Your Current 401
This option assumes that you participate in your new 401, which, again, you should be doing if you have access to one! It also assumes your new employer allows you to do this. Check with your benefits department to see if they allow for rollovers into the plan. If so, you could put your 401k from previous employer into your new plan with your current company.
When You Don’t Roll Over
Cashing out your account is a simple but costly option. You can ask your plan administrator for a checkbut your employer will withhold 20 percent of your account balance to prepay the tax youll owe. Plus, the IRS will consider your payout an early distribution, meaning you could owe the 10 percent early withdrawal penalty on top of combined federal, state and local taxes. That could total more than 50 percent of your account value.
Think TwiceThe repercussions of taking money out now could be enormous: If you took $10,000 out of your 401 instead of rolling it over into an account earning 8 percent tax-deferred earnings, your retirement fund could end up more than $100,000 short after 30 years.
If your former employers plan has provided strong returns with reasonable fees, you might consider leaving your account behind. You dont give up the right to move your account to your new 401 or an IRA at any time. While your money remains in your former employers 401 plan, you wont be able to make additional contributions to the account, and you may not be able to take a loan from the plan. In addition, some employers might charge higher fees if youre not an active employee.
Further, you might not qualify to stay in your old 401 account: Your employer has the option of cashing out your account if the balance is less than $1,000 though it must provide for the automatic rolling over of your assets out of the plan and into an IRA if your plan balance is more than$1,000.
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