If you have recently accepted a position with a new company but have 401(k) funds invested with your previous employer, it’s important to understand the three options you have moving forward.
Complete a 401(k) Rollover to Your New Employer’s Plan
The benefit of selecting this option is that all funds for your 401(k) retirement savings account will be in a single location. You may want to choose the rollover option if you’re concerned about ease of account management. Be sure to research your investment options and ensure that you feel satisfied with your choices before completing the rollover.
Leave the Money in an Account with Your Previous Employer
Most companies that offer 401(k) retirement savings plans to employees will allow them to maintain the account after resigning their position with the company. However, you need to consider these potential drawbacks before selecting this option:
- Your former employer may charge you a monthly convenience fee.
- Another company may purchase your former employer’s business or it may opt to work with a new 401(k) service provider. Both of these situations can be stressful as you will need to track down the location of your funds, possibly receive a new account number, and have to request new account access information.
- You will need to keep track of multiple 401(k) accounts in multiple locations.
Convert Your 401(k) into an Individual Retirement Account (IRA)
If neither of the above options appeal to you, consider a 401(k) rollover to an IRA. One of the biggest benefits of doing so is that you typically have more investment options and pay lower fees with an IRA as opposed to a 401(k). You will need to select whether you want a traditional IRA or a Roth IRA if you go this route.
The Internal Revenue Service (IRS) allows you to make pre-tax contributions with a traditional IRA. It will assess tax when you begin making withdrawals on the account any time after age 59½. Withdrawing before that time may subject you to a 10 percent penalty.
When you choose a Roth IRA, you pay taxes on your contributions. Your withdrawals after age 59½ are then tax-free. The IRS does impose income limitations on Roth IRAs. In 2019, phase- out begins at $122,000 annually for single filers. You cannot contribute if you earn more than $137,000 annually. For married couples, the figures are $193,000 and $203,000. The maximum annual contribution for both types of IRAs in 2019 is $6,000 for ages 49 and under or $7,000 for ages 50 and over.
How to Proceed with an IRA Rollover
You can select a direct rollover or an indirect rollover if you decide that moving your funds is your best available option. When you opt for a direct rollover, the 401(k) management company of your former employer transfers the funds electronically to the company managing 401(k) retirement savings accounts for your new employer.
With the indirect rollover option, you receive a check from the bank currently holding your funds. It is then up to you to deposit the check into your new 401(k) or IRA account. This does put you at risk of losing the check. The only thing you need to do to initiate a direct rollover is sign the appropriate form to give your authorization.
Other Things You Need to Know Before Initiating a 401(k) Rollover
It’s important that you select either the direct or indirect rollover options described above rather than withdraw the balance of your 401(k) account from the holding company of your former employer. That is because the IRS will assess a 10 percent penalty on the balance if you haven’t yet reached the age of 59½. The only exception it allows to the 10 percent penalty rule is if you quit or lose your job at age 55 or older.
Although you may need to pay a fee when requesting the rollover, it is typically nominal. Additionally, the IRS does not impose any limits for how much money you can transfer from one 401(k) account to another or from a 401(k) account to an IRA.
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