How to Rollover a 401(k) to a New Employer
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?Rolling over funds from one 401(k) to another is a way to maximize retirement earnings, but the process can initially be intimidating. It involves contacting both plan administrators, filing the correct paperwork and sending funds to the new provider. Doing it correctly means avoiding having to pay tax penalties or costly fees.
One perk many businesses offer these days is access to an employer-sponsored retirement plan known as a 401(k) plan. This retirement investment plan allows workers to invest funds into an investment retirement account to grow their money. Most companies also offer some matching, which encourages employees to start saving money early in their careers.
But what happens when a person leaves one employer for a new job? Do they keep that retirement savings (and the matched funds) or forfeit the money?
Taking funds from one 401(k) to another employer-sponsored plan is common. Because of the tax implications, however, employees should consider the rules and processes for moving these funds in a process called “rolling over.”
What is a 401(k) Rollover?
Rolling over a 401(k) from one employer or account to another involves moving funds from the previous tax-advantaged retirement plan into a new one. Rollover IRAs allow the person with the account to keep the tax-deferred status of their existing retirement assets. A person must roll over the funds to avoid paying tax or early withdrawal penalties during the transfer.
What Happens to a 401(k) When Leaving a Job
When an employee leaves a job, they may no longer contribute funds to their employer’s 401(k) or retirement plan. The money in the account, however, still belongs to the employee. What happens to those funds often depends on the amount in the account.
The employer can legally close that account if the employee contributes less than $5,000 to that 401(k). Most employers will do this because it costs them money to maintain every account.
For employees who contributed between $1,000 and $5,000, the employer may move those funds into an IRA. This is an involuntary cashout.
When an employer contributes less than $1,000, the employer may choose to mail a check for the dollar amount invested. In this situation, the employee must deposit those funds into another retirement account as quickly as possible. This avoids the 10% tax penalty for early withdrawal.
There are more options for workers who have contributed more than $5,000. It is possible in some cases to do nothing. While the company will no longer provide matching contributions, those funds can continue to sit in the account until the employee decides to do something else. This can be a good option for accounts with unique investment options or low fees.
But for many workers, the most sensible option is to roll the funds over into a new or existing retirement account.
How 401(k) Rollovers Work
If an employee elects to transfer funds via 401(k) rollover, they contact the brokerage firm that currently administers the employer-sponsored plan. The plan administrator then moves those funds directly to the new employer’s brokerage. In some cases, the employee may receive this money in a check. The employee is then responsible for mailing those funds to the new brokerage.
Anyone who wants to transfer their funds must do so quickly. The IRS gives people 60 days without penalty to roll those funds over.
Things to Consider Before a 401(k) Transfer
Deciding to roll over a 401(k) is more complicated than moving funds from one account to another. The process takes time. But more importantly, there are several factors a person should consider before they choose to move that money — especially if the sums involved are in the tens of thousands of dollars.
Fees & Expenses
Fees and expenses can differ between retirement plan providers and even retirement plans themselves. When choosing to roll over (or not), compare the fees and expenses and determine whether the new plan may end up costing more money than it is worth.
The ideal 401(k) fund offers low-cost options and no (or few) administrative fees. If a new employer does not sponsor a retirement plan, it may make sense to shop for different brokerage accounts.
Returns on Investment
If the new potential retirement accounts do not match the current 401(k)’s rate of return, it may not make sense to roll the funds over.??
Employer Contributions
Employer contributions are often a significant perk for their employees, but not all employer contributions are equal. If the employer does not offer a matching contribution to the IRA, it may not be worth joining that plan.
Employees should also consider how vesting works for their employer-sponsored retirement account. In some cases, the employer may match contributions up to a certain amount, but those funds may not be vested for a specific period. Any funds that have not been 100% vested may not be eligible for withdrawal or rollover.
Outstanding 401(k) Loans
One convenient feature of 401(k) plans is the ability to borrow against the account — up to 50% of the account balance. But anyone considering switching to a new plan must understand the responsibilities related to that loan balance.
Some employer-sponsored plans allow borrowers to continue paying off those loans. Most companies, however, expect immediate repayment. Failure to promptly repay the loan can lead to an unexpectedly hefty tax bill.
Transfer Rules?
Not following the proper rules can result in costly penalties or taxes. Failure to receive the funds from the previous employer’s plan in the form of a check could lead to a 20 percent withholding. Not depositing those funds within 60 days could lead to a 10 percent early withdrawal penalty on top of taxes.
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How to Transfer 401(k) to a New Job
Transferring funds from one 401(k) to another is simple, but the steps may vary depending on how the employee wants to do it. Most of the time, the rollover process happens as follows:
Contact New Employer
Contact the administrator of the new employer’s retirement plan. In many cases, eligibility to enroll in a 401(k) through a new company may have a waiting period. They will likely have specific instructions for the rollover, including how to send the funds and whom to make the check to.
Complete Necessary Paperwork
The next step is to complete the necessary paperwork to transfer funds. This will include forms denoting the amount of money a person wants to transfer between retirement accounts. Individuals with multiple retirement accounts through a previous employer may need to complete two sets of paperwork: one for a 401(k) and one for another account, such as a Roth IRA.?
Contact Former Employer
Contact the administrator of the previous retirement plan and ask them to transfer the funds to the new plan. Use the instructions given by the new employer-sponsored plan. Failure to follow the instructions could lead to delays in transfer.?
Move Funds
Move the funds from the old account to the new one. Typically this occurs through mailing checks to the new retirement account fund in the employee’s name. Usually, it is advisable to send the checks via certified mail or another method with tracking numbers attached.
Direct vs. Indirect Rollovers
Asking the plan administrator to make payment directly to the new retirement plan or IRA is a direct rollover. Direct rollovers are often preferable to other rollover means because no taxes are withheld from the transfer amount. The same is true for trustee-to-trustee transfers, in which the old plan administrator directly mails the funds to the new one.
Indirect rollovers occur when the plan administrator makes payments directly to the retirement plan owner. The plan owner can deposit some or all of the funds into a new account within 60 days. The IRS will withhold taxes from this distribution, so other funds are necessary to transfer the total amount.
For these reasons, it may be a good idea to use the direct method to preserve the account’s value.
Pros and Cons of Rolling Over a 401(k) to a New Employer
Like all investments, rolling funds from a previous 401(k) into an account with a new employer has both advantages and disadvantages. Depending on a person’s priorities, they may keep the account with the previous plan or detach retirement savings from their employer entirely.
Advantages
Some of the advantages of rolling retirement funds from one employer to another include the following:
Disadvantages
Rolling over funds from an old employer-sponsored 401(k) into a new employer’s program comes with some distinct drawbacks. These can include:
Rolling Over 401(k) into an IRA
Another option investors and workers have is to roll the existing 401(k) funds into another type of IRA, such as a traditional one or a Roth IRA. One benefit of non-401(k) IRAs is that the account holder owns the account and can make changes without worrying about how their employer will impact the plan. IRAs can offer wider choices for investment options than previous or new employer-sponsored options.
The drawback, however, is that funds rolled into an IRA may not be eligible for future rollovers into 401(k) plans. The account owner also must specify how they want to invest those funds. Those funds will remain in a money market account or other cash equivalents until they do so.
Roth IRAs are another popular option for retirement accounts because they are exempt from required minimum distributions. They are also tax-free, provided the account owner withdraws the money after turning 59 ?. The drawback is that converting 401(k) funds to Roth IRA funds requires paying taxes on all existing funds.?
Is it Worth It To Roll Over a 401(k) to a New Employer?
Ultimately, rolling over existing retirement accounts depends heavily on the employee’s investing priorities. For many workers, earning retirement funds through matched contributions can be a game changer for retirement savings. For others, directly controlling where retirement fund investments occur can be an exciting way to plan for their time after work.
Retirement planning is an essential part of any worker’s life. Maximizing the potential for savings involves carefully considering all options, including moving investments from one plan to another throughout a person’s career. Workers should weigh the options carefully and choose the best option for their future goals.
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(Reporting by NPD)