If you’re leaving a job that you’ve been at for a while it can be tough to think about much else beyond trying to find a new job, or getting acclimated to your new one. There are resumes to brush up on, skill sets to improve and connections to make.
There are other things that you need to think about beyond a new job, however, that are important as well. Things like doing a 401k rollover from your old job’s plan to an IRA you’ve set up on your own.
So where do you start?
What Are Your 401(k) Options When Leaving A Job
When you’re leaving a job, you have several different options of what to do when it comes to your 401(k).
- Leave it in the current plan: You can just leave your 401(k) where it is and not touch it. If you’ve got a great plan that has good low cost investments and low fees, you may want to consider doing this. The thing is, usually you can do better to moving to your own IRA through a discount brokerage or mutual fund company.
- Cash it out: You can choose to cash out your 401(k) plan when you leave the job. Honestly though I think this is an awful idea because if you’re not 59 1/2, you’ll be subject to a 10% early withdrawal penalty, along with your current combined state and federal tax rates. Assuming you have a combined rate of 35%, and a penalty of 10%, you’re only going to be left with 55% of your money. If you had $100,000 in the account, you’ll be left with $55,000 after penalties and taxes. Don’t lose out on all that money just by withdrawing it early.
- Roll it over to an IRA: Rolling over your 401(k) to an IRA that you’ve set up at an external brokerage or company like Vanguard is probably the best option. It will allow you to have access to more and better funds, lower costs and more control.
- Roll over to a new 401(k): If you already have a new job and 401(k), you may want to consider rolling the funds over if it’s a good plan. Typically you can do better rolling to an IRA, however.
So when it comes down to it, my suggestion is to roll the funds over to your own IRA at a company like Vanguard, or a discount brokerage.
Reasons To Rollover Your 401(k) To An IRA
There are a variety of reasons why you may want to rollover your 401(k) to your own IRA once you’ve left your old job. Here are a couple of the biggest:
- Better investment options in an IRA: When you invest in your company sponsored 401(k) the plan that they have set up may not have that many investment options, or the ones that they do may not be the greatest. Many only offer one index fund, something like a S&P 500 index fund, and a few other low cost options. Rolling over your funds will give you more investment options in order to maximize your returns.
- Lower fees in an IRA: Quite often a 401(k) through your company will have a bunch of pre-selected mutual funds that don’t have very good expense ratios. On top of that the plan may have an annual management fee or other miscellaneous fees. By moving to your own IRA you can select low cost mutual funds and index funds that will allow you to cut down on expenses.
It should be stated that there area few situations where you may not want to rollover your 401(k), but I won’t go over those here as they’re few and far between. Situations like if you’re retiring early, planning a roth conversion, or situations where you’re dealing with a large amount of company stock.
How To Rollover Your 401(k)
When you’ve decided to rollover your 401(k) to an IRA, there are a few steps you’ll need to go through.
- Open an Individual Retirement Account (IRA): If you haven’t already, open an IRA at a discount brokerage, or mutual fund company. Here’s a post looking at how to choose a IRA custodian.
- Contact your old 401(k) provider, get forms: You’ll want to contact the provider of your old 401(k) to verify that you don’t have any limitations on rolling over funds. Then request the forms you’ll need in order to initiate the process. Make sure to ask what information you’ll need from your new IRA plan.
- Contact your new IRA provider, verify account setup: You’ll want to talk to your new plan administrator, whether it is a discount brokerage or company like Vanguard, and verify that your account is ready to receive transferred funds. Next, verify any information that you need for the old 401(k)’s transfer forms.
- Fill out the forms, verify direct rollover of funds: When you have the forms, make sure that they are completely and correctly filled out to ensure no costly mistakes. Make sure that you’re asking for a trustee-to-trustee transfer or direct rollover of the funds. Have them send the check directly to your new IRA company. If your old company does an indirect rollover and cuts a check for the balance of your 401(k) in your name they will withhold 20% for taxes. You are then required to deposit the total amount of your balance (before 20% was deducted) into your new 401(k), or you could be subject to taxes and a 10% penalty for the amount under your total balance – a penalty for early withdrawal. For example, if you have $100,000 being rolled over, in an indirect rollover the company would cut a check for $80,000 and withhold $20,000 for taxes. Then you are required to take the $80,000 plus $20,000 of your own money and deposit it at your new IRA within 60 days, or be subject to taxes and penalties. The extra 20k that was withheld for federal taxes will be returned when you file your return as long as you deposit all 100k in your new plan.
401(k) To IRA Rollover Conclusion
Leaving an old job can be stressful, and sometimes it can be a pain to try and roll over on old 401(k) – but it’s an important thing to investigate.
Typically your best bet is going to be either to roll your funds over to an IRA with a discount brokerage or mutual fund company, and to do a direct rollover of funds so you don’t have hairy tax situations to mess with. There are other options to take, so make sure to investigate it for your own situation and proceed down the best path for you.