Four Things You Should Consider Before Rolling Over Your 401(k)

Rolling Over Your Employer-Sponsored Qualified Retirement Plan Assets: Your Options

It’s good to know you have options. When you leave a job, you can take one of the following actions with your employer sponsored qualified retirement plan assets, the most common of which is a 401(k):

1. Leave assets in the old plan. Simply do nothing and leave your retirement savings with your old employer (if permitted). Just know you won’t be able to add additional funds to this account. And since you’re no longer an employee, plan management or administration fees, as well as fees on trades may apply. Check with your former employer or the administrator of the plan for more information.

 

2. Cash out your assets. Choosing to cash out prior to age 59 ½ from your retirement plan counts as an early distribution. This means that, in addition to being subject to income taxes, your distribution may be subject to a 10% early withdrawal penalty tax, so cashing out before 59 ½ should be avoided. Plus, you’ll be subject to a mandatory 20% federal income tax withholding and possibly state income tax withholding, depending on where you reside.

 

3. Rollover to your new employer’s plan. You may be able to move assets from your former employer’s qualified retirement plan into your new employer’s qualified retirement plan. Possible advantages include the potential of reduced fees and costs. You can generally continue contributing. And, depending on the new plan, you may be able to take a loan against your accumulated retirement assets in the plan. FYI, you may have a waiting period before you can start to contribute to your new plan.

 

4. Rollover your 401(k) to an IRA. On the plus side, you can continue to save for retirement when you roll over your retirement assets from your former employer’s qualified retirement plan (e.g., 401(k) plan) to an Individual Retirement Account (IRA). While most IRAs offer a variety of investment options, they might not offer the same options as an employer plan. And, with an IRA, you cannot take a loan against your assets. Also, you may want to compare the cost of opening and maintaining an IRA account with that of leaving your assets in your former employer’s qualified retirement account.

 

Each option offers advantages and disadvantages, depending on your particular facts and circumstances. Some of the factors you should consider during your decision-making process, include (among other things) the differences in: (1) investment options, (2) fees and expenses (Note: the fees associated with an IRA will generally be higher than those associated with a plan), (3) services, (4) penalty tax-free withdrawals, (5) creditor protection in bankruptcy and from legal judgments, (6) Required Minimum Distributions or “RMDs” (7), the tax treatment of employer stock, and (8) the availability of plan loans (e.g., loans are not permitted from IRAs, and the availability from an employer’s qualified retirement plan will depend on the terms of the plan). Please note that these are just examples of the factors that may be relevant to you when analyzing your available options, other considerations may apply to your specific situation, and the importance of any particular factor will depend upon your individual needs and circumstances. To reach an informed decision, you should discuss the matter with your own independent legal and tax advisor and carefully consider and compare the differences in your options.

Done correctly, rolling over your retirement assets from your former employer’s qualified retirement plan to an IRA or another employer’s qualified retirement plan can help you to continue to defer taxes on the growth of your retirement assets compared to withdrawing the funds from your former employer’s qualified retirement plan and then reinvesting them in a taxable account. However, there are rules to consider.

Two ways to rollover: direct or indirect

In general, you can move retirement assets that are eligible for rollover from a qualified retirement plan (such as a 401(k) or 403(b)) to an IRA without being taxed. Rollovers into IRAs typically will not result in income taxes or tax penalties to the account owner if IRA Rollover rules are followed. Before making the decision to rollover your qualified retirement plan assets into an IRA, it’s important to understand the difference between the two types and identify which one works best for you:

A direct rollover is the easiest way to move money between retirement plans/accounts. You simply have your former employer make a distribution payable to the custodian of your IRA for credit to your IRA (e.g., distribution check payable the custodian of your IRA for the benefit of your IRA). If processed correctly, a direct rollover is nontaxable.

An indirect rollover means the distribution gets paid directly to you (e.g., distribution check payable directly to you). It is then up to you to deposit the funds into your IRA no later than 60 days after you receive the distribution. If you decide to keep some, or all of the funds, or you don’t deposit the money within that time period, you will have to pay income tax on the amount you don’t roll over. If you’re under the age of 59½, you may be subject to an additional 10% distribution penalty tax.

Getting the ball rolling

Preparing for a new job or retirement can be challenging but, if you choose to roll over your workplace qualified retirement plan to an IRA, rolling it over doesn’t have to be.

If all or a portion of your rollover is coming from a designated Roth account (e.g., Roth 401(k) account, Roth 403(b) account or Governmental Roth 457(b) account), then you will need to open a Roth IRA to receive your designated Roth account assets.