How To Roll Over Your 401(k)

Here’s what you need to know to complete a 401(k) rollover.

A 401(k) retirement plan is one of the best ways to save for your retirement. They are easy to set up, you can contribute directly from your paycheck, your employer may match your contributions and you can receive significant tax benefits by participating.

With a 401(k) retirement savings plan, you can take your money with you when you leave a job. In that situation, a rollover is often the best option.

What Is a 401(k) Rollover?

A  401(k) rollover is when you withdraw funds from one eligible retirement plan and contribute them to another eligible retirement plan within 60 days. A 401(k) rollover can save you some serious money on taxes and is one of the best ways to move money between retirement accounts — if done correctly. If not, you can incur some pretty hefty fees and penalties.

Before you dive in, here’s an overview of the various issues surrounding 401(k) rollovers.

IRA vs. 401(k): 7 Tips for Choosing the Best Retirement Plan 

When Do You Need To Roll Over Your 401(k)?

A rollover is what you do when you transfer your tax-protected retirement savings from one account to another. Here are some examples of when rolling over your 401(k) may be a good idea:

Job Separation

Rolling over your 401(k) is one option to consider when leaving your current job. But you could also choose to keep your 401(k) with your former employer. You’ll still have the option of rolling it over in the future, but you’ll no longer be able to make contributions.

You Have More Than One 401(k) Plan

You may consider rolling over your 401(k) if you own several plans at past employers. It’s much easier to manage your investments and plan for retirement if all your accounts are combined.

The new normal is that the average person will likely change jobs multiple times during the course of a career, according to the Employee Tenure Summary conducted by the Bureau of Labor Statistics. Imagine how difficult it would be to track the amount of retirement you have if you have multiple 401(k)s to keep up with. In most cases, combining your 401(k)s into one account is the best option. However, if you decide to keep several older 401(k)s and not roll them over into one account, you will not be penalized for doing so.

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You Become Self-Employed 

A self-employed 401(k) — aka solo 401(k) — is typically a savings option for small-business owners who have no employees. Solo 401(k)s are a good fit for sole proprietors and independent contractors who want a retirement plan like those offered by large companies. Note that these plans have the same rules and requirements as any other 401(k) plans.

Self-employed 401(k)s align closely with standard 401(k)s in that you make contributions from your pretax earnings, which are invested and remain tax-deferred until withdrawn at retirement. If you’re self-employed and you decide that a self-employed or solo 401(k) is right for you, you can set one up through any financial institution that handles 401(k) plans. And — because solo 401(k)s can be easier to set up — fees can also be relatively low, with some companies not charging any setup or maintenance fees.

Your Current Plan Isn’t Satisfactory

If you’re not happy with your current 401(k) plan and are seeking a more diversified portfolio, your employer match is low to nonexistent or your fees are too high, it might be a good time to roll over your 401(k). Note any higher costs the new plan contains to ensure those costs won’t offset any gains or savings you’re anticipating with the rollover.

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Why a 401(k) Rollover Often Makes Sense

If you’re still not convinced, here are some reasons why a 401(k) rollover might be a good option for you:

  • Sometimes, a rollover will provide access to better fund choices and lower fees. If you’re happy with the investment options by your former employer, the option to keep your money in your current 401(k) is reasonable. But, if you’re not, a 401(k) rollover may be a better answer.
  • It can be a hassle to keep track of multiple 401(k) accounts, assuming you have a few from past employers. Rolling over several 401(k) plans into one retirement plan at your current employer can be a good option for simplifying things.
  • A rollover to a different type of 401(k) makes sense if you go from the corporate world to self-employment. Solo 401(k)s can be easier to set up and fees can be relatively low. Plus, some companies won’t charge any setup or maintenance fees for these types of plans.

Compare: The Best Retirement Plans All Have These 6 Features

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How To Roll Over a 401(k)

If you’ve decided that a 401(k) rollover makes sense for your particular situation, there are a few steps to take that can help ease the process. But, before you do, it’s important to rollover your 401(k) plan directly to your new employer’s retirement plan or to an IRA you’ve established. Called a direct rollover, it is considered the safest and most secure way to get your money from one 401(k) to the next. The best way to do this is to set up your new account first. Then, go back and request that your current 401(k) be transferred.

Take these steps to rollover your 401(k):

1) Decide Which Type of Rollover Is Right for You

Generally, people will roll over their current 401(k) into another employer-sponsored 401(k). If your new employer doesn’t offer a 401(k) or you are leaving the corporate world, you may want to consider rolling your funds into an IRA.

There are several types of IRAs: traditional IRA, Roth IRA, SEP IRA and SIMPLE IRA. Here’s a brief explanation of each:

  • Traditional IRA  A tax-deferred retirement savings account that you’re eligible for even if you participate in another retirement plan at work. You only pay taxes on your money when you make withdrawals in retirement. 
  • Roth IRA — Like a traditional IRA, this is a savings account for retirement that you can participate in while enrolled in another retirement plan. It allows your money to grow tax-free, which means you fund your Roth IRA with after-tax dollars. When you withdraw your money at retirement, no taxes will be due.
  • SEP IRA — A Simplified Employee Pension is a common IRA for self-employed individuals or small-business owners and can be maintained alongside other retirement plans. The employer contributes to the IRA in the employee’s name; employees cannot contribute. Contributions are tax-deductible and tax-deferred.
  • SIMPLE IRA — A type of traditional IRA for small businesses that generally have fewer than 100 employees, which does not require the startup and operating costs of a traditional retirement plan. Employers can’t have any other type of retirement plan with this option. SIMPLE IRAs require employers to match employee contributions — up to 3% of salary or a 2% nonelective contribution per eligible employee — whether the employee contributes or not.

Read: Beginner’s Guide to Roth IRAs

2) Set Up Your New Account

Financial firms and banks routinely facilitate 401(k) rollovers. They also have the expertise necessary to make sure your money is allocated the way you want or advise you on how to make the most of your investment. For instance, investment house TD Ameritrade handles retirement planning and 401(k) rollovers to IRAs. Wells Fargo also does 401(k) rollovers.

3) Start Your 401(k) Rollover

A direct rollover is a secure, tax-free distribution for your 401(k). Make sure you specify you want your money transferred directly from your current 401(k) to your new investment account — whether you choose an IRA, a new 401(k) or something different altogether. 

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Choosing an IRA Provider  

Deciding how to move forward with rolling over your 401(k) can be a challenge, especially if you’re not certain who to choose as a provider. After all, having the right brokerprovider or financial institution on your side can make the whole process a lot less complicated and a lot more manageable.

Most providers can assist with rolling over your 401(k) to an IRA, but — as with any business — they aren’t all equal. Shop around to find a provider that best fits your needs and expectations. Some things to consider are the variety of account options, availability of research and investing tools, as well as any commission-free and promotional offers.

For example, firms like Betterment, Wealthfront, FutureAdvisor and Personal Capital offer online assistance. Even discount brokers, like E-Trade, are available to assist you from the comfort of your home office. While there are many providers to choose from, GOBankingRates rated Fidelity as one of the best IRA providers, in part, due to its nonexistent account opening and annual maintenance fees.

See: Roth IRA Contribution Limits for 2019

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401(k) Rollover Options

There are a number of options to roll over your current 401(k), but each comes with advantages and disadvantages. 

1) Leave Your 401(k) Where It Is  

You might leave your 401(k) where it is if you are happy with your current plan because it offers excellent fund choices and low fees. Or if you’re planning to roll over your 401(k) to a new employer’s plan, but there’s a waiting period, leaving your 401(k) in place is probably the easiest solution.  Here are some more pros and cons to consider.

Pros:

  • Time to explore your options
  • Earnings remain tax-deferred until you withdraw them

Cons:

  • Neither you nor your employee will continue to make contributions
  • When you reach the plan’s retirement age, your employer may require that you withdraw your funds

2) Roll Your 401(k) Into Your New Employer’s Plan   

Rolling over your 401(k) into your new employer’s plan is a seamless process that allows your retirement savings to remain tax-deferred without interruption. Rolling over into a new plan seems like a no-brainer if the new plan offers better investment options and lower fees. Even so, as with all options, there are a few pros and cons to consider.

Pros:

  • Earnings remain tax-deferred
  • Earnings are usually protected from creditors
  • Sometimes you can borrow against your new 401(k)
  • Possibility of a more diversified portfolio and lower fees

Cons:

  • Investment choices could be limited
  • Fees might be higher

3) Roll Over Your 401(k) Into an IRA 

Rolling over your 401(k) into an IRA typically offers you more investment choices. You might save in management and administrative fees, plus some providers offer cash incentives to roll over your 401(k) into an IRA and bring your retirement money to their company. Here are some pros and cons to consider.

Pros:

  • Your investment choices may be better than in your former employer’s plan
  • Your investment can continue to grow tax-free or tax-deferred
  • You might be able to consolidate your retirement accounts into one IRA

Cons:

  • Option only available at separation from current job
  • You can’t take out a loan against an IRA
  • Assets from an IRA account are only protected from creditors in the case of bankruptcy

4) Roll Over Your 401(k) Into a Roth IRA 

By choosing to roll over a 401(k) to a Roth IRA, you can sometimes put yourself in the best possible tax position going forward. But first, take a look at the pros and cons of this option.

Pros:

  • Lower-cost investment options compared to a 401(k)
  • Roth 401(k) earnings and contributions can be rolled over tax-free
  • Additional earnings and contributions can grow tax-free

Cons:

  • Option only available when switching jobs or retiring
  • Higher taxes and investment fees may apply
  • Roth IRA loans not permitted as they are with 401(k)
  • Traditional 401(k) assets are subject to taxes at the time of rollover

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Withdrawing Cash From Your 401(k)

Life has its ups and downs, and there may come a time when you need to withdraw cash from your 401(k). The IRS allows you to take money out of your 401(k) before age 59 1/2 for certain hardships, such as medical expenses, tuition for college or funeral costs. When you take a hardship distribution, you can’t repay the portion you took out or roll it over into another plan or an IRA. According to the IRS, this could affect the amount of money you’ll have in retirement.

When you withdraw cash from your 401(k), you’re subject to tax liability and reporting responsibilities. Here’s what you need to know:

  • If you are under the age of 59 1/2 and make an early withdrawal, you will probably have to pay income tax, plus a 10% 401(k) withdrawal penalty
  • You may not be able to contribute to your plan for six months after the distribution
  • To avoid paying a penalty, see if your specific situation qualifies for a penalty-free exception by consulting the IRS’ 401(k) Resource Guide
  • Use IRS Form 1099-R  from your plan administrator for end-of-year taxes
  • File IRS Form 5329, related to additional taxes on qualified plans. Report your IRA withdrawal on IRS Form 1040.

Learn More: The Complete Guide to 401(k) Withdrawals

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    Important 401(k) Rollover Rules

    If you know the rules before rolling over your 401(k), there is less chance you will end up paying for mistakes. Here are some 401(k) rollover rules to consider.

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

    You have 60 days from the date you receive a distribution from your plan to make a 401(k) rollover. You must roll over to another qualified employer’s 401(k) plan, a traditional IRA or another qualified retirement plan.

    Don’t wait too long to make a decision. If you’re leaving your job, your employer can force you out of your current 401(k) plan and into an IRA account that it designates if your account balance is below $5,000. If this happens, you could face higher fees and fewer investment options.

    And if your 401(k) is worth less than $1,000, your employer can send you a check for the balance, which can result in tax liabilities plus penalties.

    When can you make withdrawals without penalty?

    If you leave your job in the same year or after you turn 55, you can make withdrawals from your 401(k) without penalty. In general, however, you can’t begin withdrawals on your IRA until age 59 1/2 without penalty. Early withdrawals from either a 401(k) or IRA tax-deferred retirement account are subject to a 10% penalty.

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

    You generally won’t have to pay any taxes on your 401(k) to IRA rollover if it’s conducted correctly. Speak with the plan manager about how to proceed. If you have a traditional IRA and want to initiate a rollover to a Roth IRA, however, taxes will apply.

    Explore: 401(k) Rollover Rules

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    Making the Decision To Roll Over Your 401(k)

    Whether a 401(k) rollover is right for you comes down to your unique situation. For example, you may decide that when you leave your job that you want to roll over your old 401(k) into a plan with your new employer. The rules for each retirement plan vary, however, so it’s important to know those rules upfront so you can make the best decision.

    It’s also a good idea to compare fees and requirements associated with plans that you’re considering. Finally, if you’re unsure about what is the best rollover option for your financial situation, you may want to consult with a financial advisor. 

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