What Are Your Options for a 401k Rollover to IRA?

Jeff Rose — Mon, 28 Sep 2009 13:50:30 +0000

401k Rollover Options

When you leave your job, either voluntary or not, you have to make an important decision regarding your 401(k). Many aren’t familiar with all their options on what they can do with their 401(k), but making the wrong choice could cost you. Most people are familiar with the 401(k) rollover concept but still need some help through the process. Here are your options if you are faced with this decision.

Cashing out is not the Best Option

What money you put it in yourself, you can cash out and take it with you. If your employer has a match, you maybe subject to some sort of vesting schedule. Many people choose to cash out their 401k’s. The most common reasoning I here, especially for 401k plans that have matching, is that it’s “The company’s money” not “theirs“. Wow! Isn’t that great reasoning?

By taking “The company’s money”, now that person is stuck with a 10% early withdrawal penalty plus ordinary income tax. Typically, when you cash directly from your 401k they will hold 20% standard plus the 10% early withdrawal penalty.

If you really need money, you could consider borrowing from your 401(k). The problem here is that most companies want the loan balance paid off when you leave – whether you leave work by choice or not.

Leave your 401k alone.

You always have the option to just leave the money with your old plan. The money will remain invested, and the financial firm handling your 401(k) will keep mailing you quarterly statements telling you how it is doing. Any future growth will be tax-deferred.

But this passive choice comes with an opportunity cost. If you just leave the 401(k) assets in the plan, you’re giving up control and flexibility. Your investment choices may be limited, the plan fees may be high, and you may not be able to quickly access your money or do what you want with it. If you have a trail of old 401(k)s left with a bunch of former employers, things can get really complicated when you retire – especially when you have to take Required Minimum Distributions (RMDs). Leaving the money in the plan may not be the wisest choice.

Transfer the 401k to a New Employer

Most people have the option to transfer there old 401k into their new 401k with the new employer. In the past, this used to be more difficult, but with recent government regulation changes, it’s much more easy. While this could be a good decision, a lot depends on the new options that are in the new 401k.

You could roll your 401k into an IRA

This is the choice that usually makes the most sense. You can move the money into an IRA through a rollover or trustee-to-trustee transfer. Or, you could direct the money into a so-called “conduit IRA,” a traditional IRA created to hold your old 401(k) assets until you move the money into another qualified retirement plan.

There’s no tax penalty when you do an IRA rollover or trustee-to-trustee transfer. After you do it, you have total control of the money, continued tax-deferred growth, expanded investment choices, and possibly lower account management fees.

Rolling over the money into a Roth IRA might be a great move, provided you can meet two conditions. First, your adjusted gross income has to be less than $100,000 for the year in which you make the rollover. Second, you’ll have to pay taxes on the assets you convert. The upside is considerable: you get tax-free compounding, tax-free withdrawals if you are older than age 59½ and have owned your account for at least five years, and the potential to make contributions to your IRA after age 70½ without having to take RMDs. Contributions to a Roth IRA are not tax-deductible, but there are fewer restrictions on withdrawals.

In 2009, you can fund a Roth IRA with after-tax contributions to a 401(k), 403(b) or 457 retirement savings plan – you can take those contributions and convert them to a Roth IRA tax-free, provided your AGI is $100,000 or lower. There is no limit on the conversion amount. Incidentally, in 2010, anyone can convert a traditional IRA to a Roth IRA – the AGI restriction on such conversions disappears.

What if you have to shiver through a 401(k) freeze?

A “freeze” is when your employer reduces or suspends matching contributions to your retirement plan. FedEx, General Motors and Motorola have all recently chosen to do this. The answer: don’t let up on your personal contributions. If you can manage it, adjust your 401(k) contribution to a level where you effectively replace what your employer contributed. Saving for retirement should remain one of your highest priorities.

If you still need help with your 401(k) rollver, be sure to seek counsel from a Certified Financial Planner™ professional.

Securities offered through LPL Financial, Member FINRA/SIPC

Four Options With Your 401k When Changing Jobs

Jeff Rose — Fri, 19 Dec 2008 15:51:36 +0000

401k Rollover Options

Last December, when I left my previous employer to start my own business, I had an important decision to make on what to do with my existing 401k. Luckily, being a financial planner, I knew exactly what I was going to do, but many others that are not in the profession or really don’t have a good grip on their financial situation might not be as fortunate. When changing jobs, the decision that you make to do with your 401k could be a costly one if the wrong decision is made. It’s important to know the different options that you have on what to do with your 401k whenever you leave your current job.

Cash Out 401k

The only reason that I have this option here is because you would be surprised the amount of people I talk to that elect this option. The most common reasoning I here, especially for 401k plans that have matching, is that it’s “The company’s money” not “theirs“. Wow! Isn’t that great reasoning?

By taking “The company’s money”, now that person is stuck with a 10% early withdrawal penalty plus ordinary income tax. Typically, when you cash directly from your 401k they will hold 20% standard plus the 10% early withdrawal penalty. Obviously, this was not the direction I was going to go.

Leave the 401k There

My previous 401k at A.G. Edwards & Sons was one of the best around. I don’t think I’ve seen another that had such a wide array of solid investment choices. I guess one could have made the argument to leave it there, but considering my circumstance, that probably wasn’t the best idea. Considering I was leaving to work for a competitor, LPL Financial, it definitely made more sense to take it with me.

I have heard of instances where people have left their 401k’s with their previous employers and have had difficulty trying to get access to the funds after a significant period. The likelihood of this increases if your previous employer comes under financial duress or merges/gets bought out by another company.

Transfer The 401k to a New Employer

In my case, since I was essentially starting my own business, this was not an option for me. What did I do? Read on to find out…..

Rollover Your401k Into Your Own IRA

Rollover into IRA

I would argue that this would be the most advantageous thing to do. By rolling over your 401k into an IRA, you will further diversify from your new plan, meaning that you can utilize different investments options that complement what you would have in your new plan going forward. In addition to that, you also have full control on the investment decisions inside the plan whereas in a 401(k), you are limited. You have full reign to make all the decisions that you want and you may even seek the counsel of a financial advisor to help direct you in what investment direction that you would go.

Good Financial Cents -Jeff Rose Certified Financial Planner and Investment Advisor, Carbondale, Illinois » 401k rollover options