How to roll over your 401(k) in 5 easy steps


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If you’re leaving your job for a new employer, it’s important to address whether or not to roll over your 401(k). The wrong decision could end up costing you.

Rolling over a 401(k) with investments that have high expense ratios into a fee-free individual retirement account (IRA) could save you a substantial amount of money. According to the Department of Labor, a 1 percent increase in fees could reduce your retirement account balance by 28 percent.

This choice isn’t the perfect one for everyone. But if it is the right fit for you, how do you get the money from your 401(k) to an IRA? It’s called a 401(k) rollover and requires the following steps.

How to roll over your 401(k)

Follow these five steps to get started on your 401(k) rollover:

  1. Decide where you want the money to go.
  2. Decide what kind of account you want.
  3. Contact the right institution to open your account.
  4. See what the procedure is to begin the rollover process.
  5. Remember the 60-day rule.

What is a 401(k) rollover?

A 401(k) rollover is when you direct the transfer of the money in your 401(k) plan to a new plan or IRA. The IRS gives you 60 days from the date you receive an IRA or retirement plan distribution to roll it over to another plan or IRA. You’re allowed only one rollover per 12-month period from the same IRA.  This one-rollover-per-IRA limit doesn’t apply to plan-to-plan rollovers and some other types of rollovers.

Overview: How to start your 401(k) rollover

1. Decide where you want the money to go

Choose a brokerage or bank that you want to roll over your money to.

Bankrate has done the homework for you with its Brokerage Reviews. These reviews will help you compare key areas that should factor into your decision. You’ll find information on minimum balance requirements, investment offerings, customer service options and ratings in multiple categories.

Takeaway: If you already have an IRA, you may be able to consolidate this money.

2. Decide what kind of account you want

Start by deciding whether you’re going to be a self-directed investor – making your own investment choices – or whether you’ll have an adviser making the choices for you.

You’ll also decide whether you want the money to be rolled into an IRA and whether you want the money invested in stocks, mutual funds, exchange-traded funds (ETFs) or other investment options. If you have a Roth 401(k), you would need roll those funds into a new or existing Roth IRA.

If the funds are going to be deposited in an IRA bank account, you’ll want to compare IRA savings accounts and IRA CDs to find the best fit for you. If you’re under 59 1/2 years old, traditional IRAs are meant for withdrawing money after you reach this age. Generally, you’ll incur a 10 percent penalty when making an early withdrawal.

An IRA CD may be a good option for money that needs to be saved at a fixed rate, and can’t be exposed to the volatility of investments, such as stocks or exchange-traded funds (ETFs). It also may be a good place for money that you want to be protected by either the Federal Deposit Insurance Corp. (FDIC) or at a National Credit Union Administration (NCUA) credit union. Always make sure that your IRA savings accounts or CDs are backed by the FDIC and deposits are within the insurance limits.

Takeaway: Your age – how far you are from retirement – and risk tolerance are going to factor in your decision as well.

3. Contact the right institution to open your account

If the 401(k) company is sending a check, your IRA institution may request that the check be written in a certain way and they might require that the check contains your IRA account number on it.

Takeaway: Follow your IRA institution’s instructions carefully to avoid complications. Your 401(k) institution may be able to wire the funds to the IRA institution. So check there to see what your options are for rolling your 401(k) into an IRA. And whether there are any fees for using this option.

4. See what the procedure is to begin the rollover process

After setting up the IRA, you are probably going to be asked to contact your 401(k) administrator.

You will want to select a direct rollover.

Takeaway: In a direct IRA rollover, the funds are sent straight from your 401(k) into an IRA without you touching the funds. It is important that you specify a direct rollover so that you don’t have the check made payable to you, triggering a mandatory 20 percent withholding for taxes. It’s possible you could get some of this withholding back as a tax refund if your withholding exceeds your tax liability. Additionally, the IRS charges a 10 percent penalty on withdrawals made before age 59 1/2.

5. Remember the 60-day rule

You have 60 days from the date you receive your retirement plan distribution to get it deposited into a qualified account; otherwise, it will be a taxable event.

Your 401(k) institution may send a paper check to you, to the institution where you are opening your IRA, or the money may be rolled over digitally via wire transfer.

Takeaway: If taxes are withheld from the distribution, you’ll need to use other funds in order to roll over the full amount.

What to do about an existing 401(k) at your previous employer

You may want to consult with a tax professional to make sure that you are making a decision that is best for your unique circumstances.

Here are some options to consider:

Keep your 401(k) with your previous employer

In this instance, you won’t 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 a low amount of fees, this might be the right choice for you.

Roll it over to a traditional IRA

This makes sense if you want to roll over your 401(k) and you don’t want a taxable event at this time. If you have an existing traditional IRA, you may be able to consolidate all of your IRAs in one place.

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 you’re satisfying any account minimums so that you don’t get dinged for an account maintenance fee for having a low balance,” McBride says. “… Index funds will have the lowest expense ratios. So yeah, there’s a way that you can really cut out a lot of the unnecessary fees.”

Depending on the traditional IRA, you may not be able to add to your existing one. So check with your IRA institution first.

If you are in a lower tax bracket now than you think you will be in the future, this strategy may make sense. Some 401(k) plans, however, won’t allow you to directly roll it over to a Roth IRA. If that is the case, you’ll have to roll over the 401(k) into a traditional IRA and then convert it from there to a Roth IRA.

“The letter of the law says it is OK [to roll a 401(k) into a Roth IRA]. But in practice, your 401(k) plan may not allow it,” says Michael Landsberg, CPA/PFS, member of the American Institute of CPA’s Personal Financial Planning Executive Committee.

Money moved into a Roth IRA from a traditional 401(k) has never been taxed before, so it must be included in your gross income for tax purposes.

Roll it over to your new employer’s 401(k)

If your new employer’s 401(k) plan accepts rollovers, this may be a good option if the plan’s expense ratio is lower than your previous employer’s 401(k).

It also might make sense to do this if you like your new employer’s investment options better.

While 401(k) loans are only for extreme emergencies, you may be able to take one out against your previous 401(k) balance – depending on the rules of your employer’s 401(k) – if you move your money over to your new employer’s plan.

Benefits of rolling over your 401(k)

You can consolidate your 401(k) accounts

Especially if you change jobs often, you might find yourself with many 401(k) accounts scattered around. The more accounts you have, the harder it may be to actively make decisions.

You could possibly have more investment choices

With your 401(k), you are restricted to the investment and account options that are offered. An IRA can give you a more diverse option of items to invest in.

This may include investing in individual stocks, bonds or other vehicles that may not be available in your 401(k).

You can’t add to the 401(k) at your previous employer. But, for instance, if you roll it over into a traditional IRA, you can add to that traditional IRA. You will have to follow the annual IRA contribution guidelines.

You’ll have the choice to bring the account anywhere you’d like

Perhaps you already have a financial adviser or financial planner that you work with. Or you have a brokerage where some of your money is being managed. These may be good reasons to roll over your 401(k).

Reasons you may choose not to roll over your 401(k)

You like your current 401(k)

If you are in a low-fee environment, you might want to take advantage of this and remain with your current 401(k) plan. Compare this fee structure to the costs of having your money in an IRA.

If it isn’t broke, don’t fix it. If you like the investment options you currently have, it might make sense to stay in your previous employer’s 401(k) plan.

A 401(k) may offer benefits that an IRA doesn’t have

If you keep your retirement account in a 401(k), you may be able to access this money at age 55 without incurring a 10 percent additional early withdrawal tax.

One way to avoid a 10 percent early withdrawal penalty with a 401(k) is if distributions are made to you after you leave your employer, and the separation occurred in or after the year you turned age 55.

This would not be the case in an IRA, where you would generally incur a 10 percent penalty when withdrawing before 59 1/2.

You may be able to postpone required minimum distributions (RMDs) for funds in a 401(k)

You currently don’t have to take an RMD until either April 1 of the year following the later of the year you turn age 70 1/2 or the year you retire.

So, if you’re still working at that age, you may be able to postpone some of your RMDs if the money is kept in a 401(k).

You can’t take a loan from an IRA

If you roll over the funds into an IRA, you will for sure not have the option of a 401(k) loan. While loans from your retirement funds are not advised, it may be good to have this option in an extreme emergency or short-term crunch.

Other items to consider

Net unrealized appreciation (NUA) and company stock in a 401(k)

If you have company stock in a 401(k), it may be beneficial to transfer those shares into a taxable brokerage account to take advantage of NUA. NUA is the difference between what you paid for company stock in a 401(k) and its value now.

If you paid $20,000 for company stock and it’s now worth $100,000, the NUA is $80,000.

The benefit of NUA is that you’d pay ordinary income tax, right now, on your basis (what you originally paid). That can be up to 37 percent, which is now the highest tax bracket, says Landsberg.

You’ll enjoy capital gain treatment, which even at the highest tax bracket is only 20 percent, on any appreciation. High earners, however, will be subject to the 3.8% net investment income tax.

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

“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.”

An NUA may be subject to a 10 percent early withdrawal tax prior to age 59 1/2.

The entire vested balance in your plan needs to be distributed within one tax year, within the same tax year. It also needs to be completed within one year of a “triggering event.” Triggering events include: death, disability, separation from service or reaching age 59 1/2.

Beware 401(k) balance minimums

If your account balance is less than $5,000, your employer may require you to move it. In this case, consider rolling it over to your new employer’s plan or to an IRA.

Always keep track of your hard-earned 401(k) money and make sure that it is invested or maintained in an account that makes sense for you.

If your previous 401(k) has a balance of less than $1,000, your employer has the option to cash out your accounts, according to FINRA.

How long do you have to roll over a 401(k)?

If you have more than $5,000 in your former employer’s 401(k), you generally won’t be forced to roll over your 401(k), according to the IRS.

If a distribution is made directly to you from your retirement plan, you have 60 days from “the date you receive” a retirement plan distribution to roll it over into another plan or an IRA, according to the IRS.

But if you have more than $5,000 in a 401(k) at your previous employer – and you’re not rolling it over to your new employer’s plan or to an IRA – there generally isn’t a time limit on making this decision.

Is it better to roll over a 401(k) to IRA?

If you like your former employer’s 401(k) plan – the investment options and the expense ratios on the investments – then it won’t necessarily be better to roll it over into an IRA. But you may find that if you roll your 401(k) into an IRA, you may have more investment options. Compare expense ratios and fees to see which option is best for you. Rolling over your 401(k) to an IRA may result in you earning a brokerage account bonus, depending on the rules and restrictions that the brokerage has in place.

Kaleb Paddock, a certified financial planner at Ten Talents Financial Planning in Parker, Colorado, says a typical 401(k) plan only has approximately 20 to 40 mutual funds available. But an IRA could give you access to thousands of exchange-traded fund (ETFs) and mutual funds.

“Another reason might be, if you want to invest in socially responsible funds or funds that invest according to a certain set of values, those funds may not be available in your 401(k) or your prior employer 401(k),” Paddock says. “But by rolling it over to … one of these large custodians, you’ll likely be able to access funds that may be socially responsible or fit your values in some fashion — and give you more options that way.”

Do I have to pay taxes when rolling over a 401(k)?

As long as you roll over your 401(k) within 60 days from “the date you receive” a retirement plan distribution, into another plan or an IRA, it should not be a taxable event. A direct rollover is another method that you can use to roll over your 401(k). Taxes generally aren’t withheld from the transfer amount, and this may be processed with a check made payable to your new qualified plan or IRA account, according to the IRS.

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