If you are close to retiring — or about to change jobs — you might be wondering what to do with your 401k account. You can start a new 401k account at your next job, but if you don’t want to keep track of multiple retirement accounts, consider rolling it over.
If you decide on a 401k rollover, you’ll need to know what taxes and fees you might be charged so you’re not surprised if your rollover check is lower than expected. Before moving forward with rolling over a 401k, consider how much rollover fees and taxes might cost you.
Breaking Down 401k Rollover Fees
When you move your 401k assets from one brokerage firm to another you’ll typically be charged fees. Not all firms charge fees because they want your business, but each fund can carry costs for managing your assets. If your new company’s plan fees are more expensive, it might not be worth making the move. Here are three methods you can use to rollover your 401k:
- Direct transfer: The rollover occurs between employers, carries no tax penalty.
- Trustee-to-trustee transfer: An institution moves your IRA or 401k money to another institution on your behalf — it does not incur tax penalties, either.
- Indirect transfer: Your 401k provider sends you the check for the entire amount in your account, which you must deposit in another retirement account within 60 days — this transfer requires that you have between 10 percent and 20 percent of your balance withheld for taxes.
In addition, brokers and plan administrators take their cuts, depending on your particular 401k rules and plan policies. Most, however, will take only between 1 percent and 3 percent of your balance.
401k 60-Day Rollover Tax Penalty
When you initiate an indirect rollover, you have 60 days to decide whether to do a 401k rollover or keep the money. If you fail to deposit the money in another account within 60 days, you’ll be subject to an early withdrawal tax penalty of 10 percent.
If there was bank error and you can prove it, however, you might receive an automatic waiver. You are limited to one 401k rollover IRA per year.
Roth IRA Rollover Tax Considerations
You can roll your 401k into a Roth IRA if you think you might end up in a higher tax bracket later in your career. Because Roth IRA contributions are made after income tax is withheld so you don’t owe any taxes when you make withdrawals, you might want to choose one for your retirement plan.
A 401k to Roth IRA rollover has special rules. For instance, because you made pretax contributions to your 401k, rolling it into a Roth IRA will likely result in hefty IRS tax implications. If you decide to roll you 401k into an IRA, make sure your employer makes a trustee-to-trustee transfer, which means it transfers your funds directly to the new institution.
401k Rollover Alternatives
If you want to keep more of your money and avoid extra 401k rollover fees you have a few alternatives. First, you can leave your 401k with your prior company, providing its fees are less than your new 401k.
Second, you can cash out your 401k, but if you’re not 59.5, you might pay an early withdrawal penalty fee of at least 10 percent of the balance in your account plus taxes. This could leave you with a lot less cash than you anticipated. The only time when you would not incur an early withdrawal penalty is if you were able to show that you have a real hardship where you need the money. Some eligible hardship situations include:
- Expenses for medical care
- Costs directly related to buying your principal residence, excluding mortgage payments
- Payments necessary to prevent eviction or foreclosure on your home
- Funeral expenses
- Certain expenses relating to damage repair on your principal residence
401k rollover rules can make it difficult to know when and where to take your money when you retire or get another job. They can also make it difficult to plan your retirement, but carefully researching each available option can make the difference between a stressful and relaxing retirement.