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When you're getting ready to retire, or if you're leaving a job, you need to decide what to do with your 401K retirement account. People often opt for a 401 k rollover, which moves the money into another account, such as a 401k at your new employer. Additionally, you may choose a 401k rollover to an IRA. Sometimes you can simply take the cash value of the account, however, this is not recommended.
There are benefits and drawbacks, whichever you choose, so it's essential to have a fiduciary financial planner to help you make the best 401K rollover choice for your financial needs.
A 401K rollover is the movement of the funds from one 401K to another 401K at a new employer or to an individual retirement account, also known as an IRA rollover.
The first step is to decide what kind of account you want. Will you be able to move your 401K balance into your current employer's 401K program, or would you rather transfer the money into your own IRA? Your new employer may or may not offer investment advice that can help invest your 401K monies, but if you opt for an IRA, you’ll have complete flexibility, control, and ability to work with your own financial planner that offers comprehensive financial advice.
Once you've determined where you want your money to go, the financial advisor can help you open the new IRA account and transfer the money or your HR department can help get you the information you need to contact your new employer’s plan.
Beware, some employer plans have a waiting period before you can deposit or participate in the new employer plan. These can range from no wait period to one year. Most plans have a six month waiting period.
This depends on your current or prior plan. Some plans allow you to leave your funds in the plan if they are in excess of $5,000. Funds under $5,000 usually are automatically rolled out of the 401K. Others it doesn’t depend on the balance, if you’re not an employee anymore they request you roll out of the plan to an IRA.
If it is an indirect rollover, according to the IRS, you have 60 days after transferring your funds to roll over your 401K to a new employer or an IRA without losing funds or paying taxes or penalties. You'll have to move quickly, as there could be some back-and-forth and paperwork you have to complete. Most common is a direct rollover where the funds are sent either directly to the new IRA or 401K. The custodian will either mail your check to the new IRA or 401K or to you, either way the funds are made payable For Benefit of you, and not made out directly to you. This affects whether or not the funds apply to the 60 day rule.
It’s generally best to request a direct rollover when moving your funds; otherwise, you could receive a check made out to you, which you may have to pay taxes on, sometimes up to 20%. The IRS could also charge a bonus penalty on withdrawing money if you're under 60 years old.
If you choose an indirect rollover option you have to act fast, as there could be a chance that you'll make a mistake, especially if you're unfamiliar with investing, retirement accounts, and transferring the money. However, you should choose a financial advisor that has the knowledge and expertise to quickly move your 401K account wherever it makes the most sense, without subjecting you to excessive fees or taxes from the IRS for transferring the money. Plus, since they know how to do this quickly, time isn't wasted figuring out where to move the money and how to do it.
When you leave a job you have several options, four exactly, for your 401K account. You can leave it at the former employer's 401K program, move it to your new employer's plan, rollover to an IRA, or cash out. In general, when you choose a direct rollover you do not lose money. You may encounter a fee to close your account or to expedite the mailing of your check, but generally you do not lose money. Your money is out of the market for the few days your funds are in transfer between accounts. If you decide to withdrawal funds or cash out you could be subjected to heavy taxes and even penalties, depending on your age.
Many people move their 401K from one employer to another one. Sometimes this is good and sometimes it’s not ideal. It depends on your situation and stage in life. Most 401K’s are low cost, which is good, but they are very limited in investment choices. You may only invest in the investments they offer in the 401K. In an IRA you have a broad selection of investment choices and more flexibility in which investment vehicles you can use.
However, if you like the 401K at your old employer and the fees are low, you may opt to keep the money in that account. However, you or your financial planner should still monitor this account's performance and structure.
If you're contemplating retirement or moving to a new job, a fiduciary financial planner / advisor can help you make the right choices for rolling over your 401k or withdrawing the funds. At Milestone Wealth Advisors, we offer a fiduciary team-based approach and a wide array of financial planning services to meet your needs no matter which milestone you're at in life. So give us a call today or email to schedule a no obligation first meeting so that we can help maximize your retirement planning and 401K management. Check out our website!
In this ebook, we outline your 401(k) choices and explore critical mistakes to avoid. Download it today