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How to rollover a 401(k)

How to rollover a 401(k) from a previous employer, is one of the first questions many people starting to work with a certified financial planner may have.


Many investors don’t take any action on their 401(k)s from former employers simply because they don’t feel they have the time or knowledge. It’s tough changing jobs. There’s no guilt in waiting a bit to roll over your 401(k).


You may keep some cash in your pants or coat pocket every day. At the end of the day, you put that cash on your bureau to put back in your pocket the next day. It’s only when we forget to move that cash and the pants go through the washer and dryer or the coat gets put away for the season, that we wish we had done something with that money.


Your 401(k) can sit with a past employer like the 20-dollar-bill that sits in your jacket all summer. It can be a happy surprise when you realize again that you have it. But there often are better options. Certainly it can simplify things and give you a clearer financial picture if your money is in one place.


Options To Rollover Your 401(k)

Just like boxing up your coffee cup and family pictures from your desk or workspace when you change jobs – make sure you know where you’re going to put your retirement savings from your old job. You have options. You can cash out your 401(k) (and pay a heavy tax penalty), you might be able to leave it where it is without future payroll contributions (if your ex-employer lets you), transfer it into your new employer’s 401(k) (again, if it’s allowed) or roll it over into an IRA (Individual Retirement Account).


For many of us, rolling over a 401(k) is the best choice. Leaving money with your ex-employer can get tricky. Human Resources no longer has as much incentive to keep you in touch with the plan’s administrator and often news is shared in internal communications within the company. Still, if you like how the plan is run and the fees seem reasonable, keeping your money in a former employer’s 401(k) can make sense.


On the other hand, I have a client who worked for decades at a newspaper and left. His 401(k) was frozen for a while after the company declared bankruptcy. What Happens If You Cash In Your 401(k)



You might be tempted to simply cash in your 401(k) when you leave your job. It might make sense if you need the money to buy your first home or you put the money towards paying for education to advance your career or have another qualified exception. In most cases, you'll generally pay a 10 percent early withdrawal penalty if you're under the age of 59½. You’ll also owe income tax on the money.


Roll Your 401(k) Into An IRA By rolling your 401(k) over into an IRA, you’ll continue to grow tax-deferred retirement savings. IRAs offer more types of investments than 401(k)s which are usually limited to mutual funds. The administrative and management fees on IRAs often are also lower than 401(k)s and you – and your advisor – can manage these fees better.


Whether you work with a financial planner, or not, the easiest and most cost effective way to roll over your 401(k) is a direct rollover from the financial institution that managed your 401(k) to the institution that manages your IRA. It’s common for the 401(k) administrator to send you a check made out to the IRA custodian. Deposit that as quick as you can.



You can have the check made out directly to you to deposit. You typically have 60 days to roll it into an IRA. You might be able to collect a bit of interest right now. If you don’t meet the deadline the money will be treated as a withdrawal and you’ll have to pay income tax and often penalties on the full amount. Your former employer will also withhold 20 percent of it for taxes.


Roth IRA v. Traditional IRA

With a traditional IRA, you contribute pretax dollars and the money grows tax-deferred over time. You'll pay taxes on both your contributions and gains when you withdraw the money -- which you can do starting at age 59 ½ . Contributions are taxed when they’re made in a Roth IRA. So, you can withdraw the contributions and earnings without paying taxes once you reach the age of 59 ½ . A Roth IRA might make sense if you believe you’ll be in a high tax bracket in the future.



Whatever option you choose, it’s important to have a plan and be intentional with your retirement savings.


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.


Investment advice offered through Private Advisor Group, LLC, a registered investment advisor.

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