By: Trent Grzegorczyk
Whether you’re switching careers, just got laid off, or retiring, your old 401(k) may not be at the top of your priority list. However, rolling over your 401(k) is an incredibly important step that requires due diligence and planning. When leaving an employer, there are typically three workable opportunities to continue the growth of your retirement funds. Understanding which route offers more advantages for continued growth that will align with your next chapter in life is the first step.
The first step is to review your options. If you are switching jobs, your new employer my accept the incoming transfer of your old 401(k), but this depends on the plan structure. Most 401(k) plans have very limited investment options, so you could be better off investing the funds within an IRA. By investing within an IRA, you'll have access to every investment option on the market as opposed to just 10-20 within a 401(k). Plus, your financial advisor can manage the account and rebalance as needed for you. If you are retiring, then you should highly consider rolling over to an IRA as opposed to leaving it with your old employer. Check out how we recently helped Jennifer, a Traverse City Munson nurse, retire with confidence.
Before you start, gather your most recent account statement and plan documents. When you signed up for the plan, you may have selected both traditional and Roth 401(k) contribution types, but keep in mind, these are two separate accounts. Traditional 401(k) contributions are tax-deferred which you'll pay later on and Roth contributions have already been taxed at the time of contribution.
If you are leaning towards rolling over your 401(k) to an IRA, then you'll potentially have to open two separate accounts, a Roth IRA and traditional IRA. This way you have a place to hold both pre-tax and post-tax dollars separately to avoid triggering a big taxable event.
It’s a good idea to meet with a fiduciary advisor before starting this process so you don't fall into the trap of an irreversible mistake. You‘ll want to choose the right type of retirement account to avoid paying unnecessary taxes or penalties. For example, if you decide to rollover your traditional 401(k) into a Roth IRA, you should prepare to pay taxes on the conversion.
A financial advisor can help you make more informed decisions as you continue to invest and prepare for retirement. They can offer assistance by reviewing your previous employer’s plan and weighing the benefits of your new employer’s retirement plans. More importantly, their involvement will make sure the necessary steps are taken to move your funds without repercussions.
If you leave money in your previous employer’s plan, it’s a good idea to have an advisor review the plan’s progress over time. If you decide to transfer funds, the previous plan’s administrator typically transfers the funds to your IRA in three ways.
The first is by a check that is sent to the address on record, which you'll then have to forward to the financial company that has your IRA. You'll want to make sure the check is made payable like this: "TD Ameritrade Institutional FBO John Smith IRA 1234567". This type of transfer can take 10-14 business days or more, once the proper rollover documents are submitted to appropriate parties.
The second method is to send by check, directly to the new financial institution where your IRA is held. This option is better than the first because it reduces the time your funds are in transit and gets the money back into the market sooner.
The third and best option is to transfer the funds via wire or ACH. This is the most secure and usually the quickest option, but not all plans offer this method of distribution.
Depending on the length of your previous employment, it’s a good idea to check the associated vesting schedules. Vesting schedules are tied to the employer’s contributions and determine the amount and date when the employer’s contributions are legally yours. Your own contributions are fully vested from day one.
Age is another contributing factor when deciding how to approach a former employer’s 401(k). For instance, if you quit a job, are laid off or fired the year you turn 55, you may withdraw funds penalty-free from the 401(k) established through that employer only.1 If you choose to roll the funds over into another 401(k) or IRA, you will need to wait to withdraw those funds until age 59½ in order to avoid the 10 percent withdrawal penalty.
In addition, this penalty-free withdrawal does not count for 401(k) accounts established through previous employers. It only is eligible in regards to the account established with the employer you've left at age 55 or older. If you're unsure about what options may be right for you, talk with an independent retirement planner to help ease your concerns and help you avoid costly mistakes.
It’s important to also keep in mind that your new employer may have a waiting period before you’re able to rollover funds. In this case, your advisor may suggest that you open an investment account to continue contributions during the waiting period. Opening another account allows you to continue saving for retirement until you make your final decision.
From old job to new, you’re on the right track by having already started saving for retirement. By working with an independent financial planner, you’ll gain further insight and understand the options of moving your funds that is best for you and your situation. They will also help with navigating any future changes you may encounter along with managing your portfolio and optimizing it along the way.
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