What To Do With an Old 401k When You Quit
A 401(k) rollover is the process of transferring funds from your 401(k) retirement account to another retirement account, such as an Individual Retirement Account (IRA) or another 401(k) plan, without incurring taxes or penalties. This typically happens when you leave a job and want to move your 401(k) balance into an IRA or your new employer’s 401(k) plan.
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Why Consider a 401(k) Rollover?
Consolidation: If you’ve changed jobs a few times, you might have multiple 401(k) accounts with different employers. Rolling them over into a single IRA or another 401(k) plan can make it easier to manage your retirement savings, track performance, and adjust your investment strategy.
More Investment Options: 401(k) plans often have limited investment choices, typically offering a selection of mutual funds. By rolling over to an IRA, you might gain access to a broader range of investment options, including individual stocks, bonds, ETFs, and alternative investments.
Lower Fees: Some 401(k) plans have high administrative fees or expensive mutual fund options. An IRA might offer lower-cost investment options, which can reduce the fees you pay and potentially boost your long-term returns.
Flexibility: IRAs generally offer more flexibility when it comes to withdrawals. For example, you may have more control over how and when you take distributions, which can be helpful for tax planning.
How to Roll Over a 401(k)
Choose the New Account: Decide where you want to roll over your 401(k). This could be an IRA with a brokerage firm, a new employer’s 401(k) plan, or another retirement account.
Contact the Plan Administrator: Notify your 401(k) plan administrator of your intent to roll over the account. They will provide instructions and the necessary paperwork.
Select the Rollover Method:
Direct Rollover: Request that the funds be transferred directly from your 401(k) plan to the new retirement account. This avoids any tax withholding.
Indirect Rollover: If the funds are distributed to you first, 20% will be withheld for taxes. You must deposit the full amount (including the 20% withheld) into your new account within 60 days to avoid taxes and penalties. The 20% withheld can be claimed back when you file your tax return.
Complete the Rollover: Once the funds are transferred, confirm with both the old and new account administrators that the process is complete.
Invest the Funds: Decide how to invest the rolled-over funds in your new account. This might involve selecting specific stocks, bonds, or mutual funds, depending on your investment strategy and goals.
Things to consider:
Taxes and Penalties: If you don’t complete an indirect rollover within 60 days, the amount distributed to you may be taxed as ordinary income, and if you’re under 59½, a 10% early withdrawal penalty may apply.
Employer Stock: If your 401(k) holds employer stock, consider the tax implications of rolling it over. There may be special tax treatment for net unrealized appreciation (NUA) on the stock that could be beneficial.
Rollover Timing: If you expect to be in a lower tax bracket in the future, timing your rollover to coincide with that period might reduce your tax liability if any taxes are due.
Plan Rules: Some employers’ 401(k) plans allow you to leave your funds in the plan even after leaving the company, especially if your balance is above a certain threshold. This might be worth considering if the plan has good investment options and low fees.
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Disclaimer: This video is for entertainment purposes only. Everyone's situation is different so do your own research before making any decisions with your money.
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