Recently started a new job or considering a career change? You may be wondering what this means for your retirement savings under your current employer’s plan. Or maybe it hasn’t crossed your mind. If that’s the case, then here is a sign that you should at least consider the alternatives before deciding to do nothing with your 401(k). Generally, your options will include leaving your savings where they are, transferring your savings to your new employer’s plan, or initiating a 401(k) rollover.
Once you decide what you’d like to do with your savings, depending on your decision, you may be wondering the length of time you have to act or what the limitations are. In that case, especially, it would benefit you to talk to a financial advisor to understand how things may get complicated. Here are the basics.
This is your default option and is the most convenient, however, it may not always be the best choice for you. It’s more common than you may think, as many people simply forget about their 401(k) savings at their old job when they make a switch.
If you have more than $5,000 saved in your 401(k) with your previous employer, you may keep your savings where they are when you change jobs under the conditions of most plans.
“If you do have a big balance saved in this plan, then it could make sense to keep it there if what you pay in fees is lower compared to the fees it would cost you to roll it over,” says Jonathan Bailey, Financial Coach here at rebel Financial. Fees may increase for you once you are no longer an employee, however, so keep that in mind when comparing rates.
“Also, if the investment options available in your previous employer’s 401(k) are better than your new employer’s,” he follows, “this may be another reason to leave your funds where they are.”
If you have less than $1,000 saved in your previous employer’s plan, they will simply write you a check for your savings. “The balance simply isn’t high enough at this point to keep in their plan,” comments Bailey. If the amount is not rolled into a new plan or IRA within 60 days of distribution, you may receive early distribution penalties and have taxes withheld, as the amount will be treated as part of your income.
If you have more than $1,000 but less than $5,000 saved in your 401(k) at your old job, your previous employer will typically assist in the transfer of your funds into an IRA. “Ultimately, you probably will want to roll your savings over…because when you keep them in your previous 401(k), there’s no new money going into it and there’s nobody managing it for you,” Bailey recommends.
Because many employers require employees to be with the company for a certain period of time before they are eligible to take part in their 401(k) plan, you’ll want to weigh the pros and cons of choosing this option. If you choose to make a direct transfer, this can usually be done very simply on an administrator-to-administrator basis, once the request is received, and there’s no tax withheld.
As with the previous option, better costs and investment options are major reasons why you may want to transfer your savings into your new employer’s 401(k). By rolling your previous plan’s savings into your new one, you will be able to better manage your old money as well as the new money because it will be going into the same account.
Choosing to roll your savings into an IRA will give you more control over your investments and what happens to the savings if you change jobs again.
As long as your 401(k) rollover is pre-tax to pre-tax, you can roll your savings into a single IRA. This would be the case when rolling a traditional 401(k) into a traditional IRA.
If you have a Roth 401(k) with your previous employer, your company match will always be pre-tax, so you will have two separate types of funds in your 401(k). “When you roll it over, you may open a traditional IRA for the pretax portion to keep the tax deferral, and a Roth IRA for the after-tax portion of the 401(k)”, explains Bailey.
Of course, you cannot move savings that have already been taxed into a traditional account, since the tax has already been realized.
One benefit of doing this is that there is no limit to the amount that can be rolled over into your IRA. You will, however, be limited to the maximum annual contribution amount of $6,000 for 2020 and 2021 ($7,000 for ages 50 and above). Your rollover does not count toward your contribution limit.
In general, you can open an IRA with a traditional advisor or investment manager, a robo-advisor, or an online broker if you’re planning to manage your own investments.
How the rollover is initiated depends on whether you’re choosing to have a direct or indirect rollover. Indirect rollovers occur when your former employer sends the money to you, personally, to then complete the transfer to your new account. This requires multiple transfers to occur in order to complete the rollover.
Direct rollovers, on the other hand, do not require intermediate transfers to take place. Your former employer may send the money via check or wire transfer from your current account to your new account directly. Alternatively, they may initiate your direct rollover by sending you the check that is endorsed to your IRA, rather than sending it directly to your custodian. Your role would simply be to ensure the check makes it to your custodian to properly complete the transfer.
Note that indirect 401(k) rollovers can get tricky, especially when it comes to transferring money from a traditional account to a traditional IRA, because of tax complications.
Once you’ve decided what you’re going to do with your retirement savings under your previous employer, it’s important to act quickly. The 60-day rule may only be applicable in certain scenarios, but you don’t want to leave your retirement savings unmanaged for a long period of time and waste growth potential.
All statements and opinions expressed are based upon information considered reliable although it should not be relied upon as such. Any statements or opinions are subject to change without notice.
Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed.
The information expressed does not take into account your specific situation or objectives and is not intended as recommendations appropriate for any individual. Readers are encouraged to seek advice from a qualified tax, legal, or investment adviser to determine whether any information presented may be suitable for their specific situation. Past performance is not indicative of future performance.
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rebel Financial is a Registered Investment Advisor that provides retirement planning, estate planning, financial planning, and investment management services to individual and institutional clients. To get a more detailed description of the company, its management, and practices, view our (form ADV, Part2A) and Disclosures.
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