401(k) Rollover
Changes in life mean changes in financial considerations as well. Whether retiring or changing jobs, if you have a 401(k), you’ll want to know your options for this account so you can decide what is best for your situation.
What are my options for my 401(k)?
There are four potential options for your 401(k) when leaving an employer:
- Option #1: Leave it in your former employer’s 401(k) plan, if allowed by the plan.
- Option #2: Move it to your new employer’s 401(k) plan, if you’ve changed employers and your new employer plan allows for it.
- Option #3: Roll the account over to an Individual Retirement Account (IRA).
- Option #4: Cash it out, which is subject to potential tax consequences.
Should I roll over my 401(k)?
While you have several options with your retirement plans, one option to avoid in most circumstances is cashing out your plan. If you are younger than 59 1⁄2, the IRS will generally consider the payout an early distribution, and you could be assessed a 10% early withdrawal penalty in addition to federal and state income taxes. Even if you are 59 1⁄2 or older, by cashing out, you will typically pay income taxes on all the assets at once.
One of the key benefits of a 401(k) plan is tax-deferred growth. Instead of cashing out, consider your options for leaving your money in the plan, moving it to your new employer plan or rolling your money to an IRA. All three options will allow you to continue to earn tax-deferred growth, but there are several differences between them.
You likely won't be able to add to your account or consolidate other accounts with your 401(k) after you leave your job. But, you may want to leave your 401(k) with your employer if it offers a good selection of quality investments, it's low cost, and you're satisfied with the services you receive. Also, if you turn 55 or over the year you leave your employer, there are tax advantages to leaving your 401(k) where it is as you will be able to take distributions before you are 59 ½ without penalty.
Move It to Your New Employer
If you are changing jobs and it’s allowed by your new employer’s plan, you may have the option of moving your money from your former employer's plan to your new employer's plan. This is one way you can consolidate your retirement accounts and maintain lower fees typically offered by an employer 401(k) plan. Additionally, if you plan to work past age 73, you generally do not have to take required minimum distributions (RMDs) from your current employer's plan. Keep in mind, though, that your new employer's plan may have different investment options, fees, services, and distribution options than your former employer's plan.
Roll It Over to an IRA
An IRA generally offers a broader selection of investment options and services than a 401(k). It also allows you to consolidate all your investment accounts with one provider which can make it easier to monitor and manage your assets. IRAs typically have higher fees and expenses than a 401(k), though, and you generally can't take penalty-free withdrawals until age 59 ½.
| Leave 401(k) with former employer | Move 401(k) to new employer | Roll 401(k) over to IRA | |
|---|---|---|---|
| Associated Costs | Fees and expenses will depend on the plan and investment options, but typically, the fees and expenses in your employer plan are lower than those of an IRA. | Fees and expenses are typically higher than those in an employer plan. | |
| Investment Options | May be limited based on the plan. | Typically have a greater number of investment choices. | |
| Education and Advice Services | Availability of investor education and advice services depend on the plan. Plans may offer educational materials, online tools, telephone helplines and/or investment advice. | A financial advisor can provide personalized advice based on your goals. | |
| Account Consolidation | Consolidation with other accounts is generally not an option. | May be able to consolidate the previous employer plan with the new employer plan. | You can consolidate plans from former employers and maintain your other assets with the same firm. |
| Tax penalties for withdrawals before age 59 1⁄2 | Employer plans offer certain exceptions to the 10% penalty that are not available with an IRA. For example, if you leave your employer in the calendar year you turn 55 (or later), most employer plans offer penalty-free early withdrawals between the ages of 55 and 59 1⁄2. | In general, a 10% early withdrawal penalty applies if you take money before age 59 1⁄2. | |
| Required minimum distributions (RMDs) | You generally must take RMDs when you reach 73. | If planning to work past age 73, you generally do not have to take RMDs from your current employer’s plan until you leave your employer. | You generally must take RMDs when you reach 73. |
| Employer stock/securities | You may be able to receive special tax treatment on employer stock/securities in your plan (referred to as net unrealized appreciation or NUA). | If you roll over employer stock/securities to an IRA or another employer plan, you lose the ability to use the NUA strategy. | |
What you decide to do depends upon your situation, but you can talk about your options and how they align with your goals by contacting an Edward Jones financial advisor.
How do I roll over my 401(k)?
If you have decided to roll your 401(k) over to an IRA, it’s usually an easy process.
First, determine what type of IRA you can roll your 401(k) over to:
- A Roth 401(k) can only be rolled over to a Roth IRA.
- A traditional 401(k) can be rolled over to a traditional IRA or Roth IRA. If you roll it to a Roth IRA, though, it's considered a Roth conversion, and the rollover is subject to taxes. Even if you want to convert your assets, it may be easier to rollover to a traditional IRA first and then complete a Roth conversion.
Next, decide how to move your 401(k). Money can be moved from an employer plan into an IRA through either a direct rollover or an indirect rollover.
Direct Rollover
You generally want to move your money through a direct rollover. A direct rollover occurs when your plan issues a check or securities payable directly to an IRA custodian for your benefit. It’s generally a non-taxable distribution, and no taxes are withheld from the amount you rollover. If you have an RMD, though, you must take it before requesting the rollover since RMDs cannot be rolled over.
Indirect Rollover
An indirect rollover occurs when your plan issues a check payable directly to you and you roll over the money to an IRA within 60 days. With an indirect rollover, the taxable portion of the distribution is subject to a mandatory 20% federal tax withholding. Any amount, including the 20% withholding, not rolled back into an IRA within 60 days is generally taxable and possibly subject to an early withdrawal penalty.
To discuss your situation and goals when it comes to a 401(k) or other investment options, find an Edward Jones financial advisor near you.