When you leave a job, whether it’s by choice or due to circumstances beyond your control, there are many decisions you’ll need to make, including what to do with your employer-sponsored 401(k) plan. One option that people choose is to roll their 401(k) over into an individual retirement account (IRA).
Understanding your 401(k) options when leaving a job
When you leave a job, whether it’s by choice or due to circumstances beyond your control, there are many decisions you’ll need to make, including what to do with your employer-sponsored 401(k) plan. One option that people choose is to roll their 401(k) over into an Individual Retirement Account (IRA).
- Leaving it with your old employer: You can leave your 401(k) funds in your former employer’s plan, provided the plan allows it and your account balance meets the minimum threshold. This option might be beneficial if the plan offers good investment options and low fees.
- Rolling It over to your new employer’s plan: If you start a new job that offers a 401(k) plan, you can roll over your old 401(k) into your new employer’s plan. This can be a good option if the new plan has better investment options or lower fees than your previous plan.
- Rolling It over to an IRA: Rolling your 401(k) into an IRA provides you with more control and potentially a wider range of investment options. This move also consolidates your retirement savings if you have multiple 401(k) accounts.
- Cashing It out: While this option provides immediate access to your funds, it’s typically the least advisable. Cashing out a 401(k) before age 59½ usually incurs significant taxes and penalties, which can significantly reduce your retirement savings.
What is an IRA rollover?
An IRA rollover is a process through which you can move your retirement funds from a 401(k) plan into an IRA. An IRA is a personal retirement account that you own and manage, rather than a plan that is provided by your employer. By rolling over your 401(k) into an IRA, you gain more control over your retirement funds, as well as potentially more investment options.
Why consider an IRA rollover?
There are several reasons why you might consider rolling over your 401(k) into an IRA:
More control: When you roll your 401(k) over into an IRA, you become the owner and manager of your retirement funds. This gives you more control over how your money is invested, when and how much you withdraw, and other important decisions.
More investment options: With a 401(k) plan, you are limited to the investment options offered by your employer. When you open an IRA, you have access to a much wider range of investment options, including individual stocks, bonds, mutual funds, and exchange-traded funds (ETFs).
Interested in even more investment options? You may consider rolling your 401(k) into a self-directed IRA. A self-directed IRA is an IRA that allows you to invest in a wider range of assets, including real estate, private equity, and other alternative investments that are not typically available through traditional (non-self-directed) IRAs. To open an account that offers this type of flexibility, you need to seek a self-directed IRA custodian.
Consolidation: If you have multiple 401(k) plans from previous employers, rolling them over into a single IRA can make it easier to manage your retirement funds and keep track of your investments.
Transferring a 401(k) after leaving a job: what’s involved
Transferring a 401(k) after leaving a job involves several steps:
- Contact your 401(k) plan administrator: Start by contacting your 401(k) plan administrator to understand your plan’s rules and options for rolling over funds.
- Choose your new retirement account: Decide whether you want to roll your 401(k) into an IRA, a self-directed IRA, or a new employer’s 401(k) plan.
- Initiate the transfer: For direct rollovers, your 401(k) plan administrator will send the funds directly to your new IRA custodian or your new employer’s plan. For indirect rollovers, you’ll receive a check that you must deposit into your new account within 60 days to avoid taxes and penalties.
- Complete any required paperwork: Both your old and new plan administrators may require you to complete forms to process the rollover. Make sure to complete all paperwork accurately to ensure a smooth transfer.
Rolling over a 401(k) into an IRA
If you’ve decided that an IRA rollover is the right choice for you, there are a few different options for making the transfer:
Direct rollover: With a direct rollover, your 401(k) plan administrator sends the funds directly to your new IRA custodian. This is often the easiest and most straightforward method, as it minimizes the risk of mistakes or delays.
Indirect rollover: With an indirect rollover, you receive a distribution from your 401(k) plan, and then have 60 days to deposit the funds into an IRA. However, this method may pose a risk if mistakes are made or delays result in taxes and penalties.
Trustee-to-trustee transfer: With a trustee-to-trustee transfer, your 401(k) plan administrator sends the funds directly to your new IRA custodian. This method is similar to a direct rollover, but it may be more suitable if you have a complex retirement plan or specific requirements.
Benefits and considerations of rolling over your 401(k)
Rolling over your 401(k) to an IRA can offer several benefits, such as more investment choices, greater control over your funds, and potentially lower fees. IRAs typically have a broader range of investment options than 401(k) plans, which can help you better tailor your portfolio to your financial goals.
However, it’s important to consider potential downsides, such as losing certain benefits that your 401(k) plan may offer, like loan options or creditor protection. Additionally, if you’re considering an indirect rollover, you must complete the transfer within 60 days to avoid taxes and penalties.
Common mistakes to avoid when rolling over a 401(k)
When rolling over a 401(k) to an IRA, there are some common mistakes to avoid:
- Missing the 60-Day deadline: If you opt for an indirect rollover and don’t deposit the funds into your new IRA within 60 days, the IRS will treat the distribution as a withdrawal, resulting in taxes and potential penalties.
- Not understanding tax implications: Rolling over a traditional 401(k) to a Roth IRA involves converting pre-tax funds to after-tax funds, which can trigger a significant tax bill. Be sure to understand the tax implications before proceeding.
- Choosing the wrong account type: Make sure to select the right type of IRA that aligns with your retirement strategy. For example, a Roth IRA may be more suitable if you expect to be in a higher tax bracket in retirement.
Consulting with a financial advisor can be beneficial when deciding what to do with your retirement funds after leaving a job. Whether you are considering an IRA rollover or another option, it’s important to understand the implications and choose the best path for your financial future.
