Rolling Over a 401(k)

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by Advice Chaser
by Advice Chaser
person in orange long sleeve shirt writing on white paper

Are you planning to change jobs? Have you just started working for a new company? What are you planning to do with your retirement account from your previous employer? You have choices for how to deal with that money, but it takes careful management to make sure you don’t have to pay taxes on it.

You can leave the money where it is, roll it over directly to a new account, roll it over indirectly, or take the money out. The best choice for you depends on your situation.

Option 1: Leave it where it is

You may be able to leave your 401(k) where it is, though there may be a minimum balance requirement. In most cases, you can keep the account open if you have over $5000 in it. If you have between $1000 and $5000, your employer can force you out, but must help you set up an IRA for the money. If you have under $1000, they might simply issue you a check for the amount. At that point, it’s up to you to come up with another strategy.

There could be advantages if you leave your 401(k) alone. If you have a large investment there and are happy with the way it’s being managed, there’s no real reason to change. Many employer-provided 401(k)s have lower fees, professional management, and more creditor protection than you can get in an IRA. 

However, it can be easy to forget about an account when you’re no longer able to contribute to it. And some employer-provided 401(k)s have fewer options than an IRA.

Option 2: Direct rollover

If you roll over the 401(k) directly from the old account to a new account, the money remains tax-free. This is called a trustee-to-trustee transfer. Since you’re not withdrawing any money, you won’t owe any taxes.

In order to do this, you need a new retirement plan that allows rollovers. Ask your new employer if they offer a 401(k) or 403(b) that accepts rollovers from other plans. While you’re at it, research the investment options in the plan to see if it’s really where you want to invest your money. If it’s comparable to or better than your old plan, talk to both the old and new employer about how to roll over the old account.

If you don’t have a plan at your new employer that you like, you can roll over to an IRA. You set up an IRA on your own, at the bank of your choice. You still won’t owe any taxes on it until you withdraw money. The options are limitless, and you have a lot of flexibility.

Option 3: Indirect rollover

An indirect rollover involves taking a disbursement from the old account and immediately depositing it into the new account. This is still tax-free—if you make the deposit within 60 days. If you don’t, you’ll be liable not only for taxes, but also for a 10% penalty for early withdrawal.

For this reason, it’s important to make sure your new retirement account is already set up and receiving contributions before taking the disbursement from the new account. Sometimes that will happen a few months after starting at the new job, and you don’t want to miss the deadline and be stuck with a tax penalty.

Option 4: Take the money out

You always have the option of simply taking a disbursement and walking away. If the amount is small, it won’t make much difference to do this. If the amount is large, however, you will be liable for taxes and penalties in most cases.

The exception is when you are over 59½. At that age, you are no longer subject to the 10% penalty. If you have had the account for at least five years, you also can take your distribution without paying tax. If you’ve reached that age but haven’t had the account for five years, you only have to pay tax on the earnings portion of the account, not your initial investment.

Explore your options

For all your 401(k) and IRA account questions, a financial advisor is there to help. Call today to be connected to an advisor experienced with retirement accounts.

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