When you change jobs, you need to decide what to do with your old 401(k). If your new employer’s plan charges high fees or offers a thin selection of expensive mutual funds, you can opt for a 401(k) rollover to an individual retirement account (IRA) instead. Here’s everything you need to know to move your 401(k) into an IRA.
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Track them down to roll them over into an IRA
Compare & pick a new IRA, or use an existing one
Our team handles the transfer - giving you peace of mind
Why Roll Over Your 401(k) to an IRA?
If you decide to roll over your retirement savings, it might make sense to choose an IRA instead of another 401(k). Consider these benefits:
You Get More Investment Options
In a 401(k) plan, your mutual fund investment options can be limited, points out Dominique Henderson, certified financial planner (CFP), founder of DJH Capital Management.
“Often you have between six and 24 fund choices in a 401(k),” Henderson says. “With an IRA, you can choose individual stocks as well as funds—and even use alternative investments.” Alternative investments can include everything from real estate to Bitcoin, but you’ll also have access to a wider range of index funds as well as exchange-traded funds (ETFs), which are often missing from 401(k) offerings.
You May Be Charged Lower Fees
Even if your company covers fees charged by your plan now, it may not once you’ve parted ways. And you have no guarantee your future company’s 401(k) will be fee-free. Make sure you have a handle on potential costs your employer-sponsored retirement plan has just for managing your money.
While you’ll probably never be able to escape fund expense ratios, you can minimize or completely eliminate most administrative fees by moving from a 401(k) to an IRA. An IRA may also afford you better access to more low-cost funds, like index funds.
You Might Want a Roth Account
If your 401(k) plan doesn’t provide a Roth 401(k) option, you might choose to roll your retirement savings into a Roth IRA. Advantages of a 401(k)-to-Roth IRA rollover include:
• Avoiding Roth IRA income restrictions. Even if your annual income is above the thresholds for Roth IRA contributions, you’re still allowed to roll your 401(k) savings into a Roth IRA. This move is commonly referred to as a backdoor Roth IRA conversion, and it can grant you the benefits of tax-free withdrawals in retirement.
• No required minimum distributions (RMDs). With a 401(k)—or even a traditional IRA—you’re subject to RMDs, or the mandated annual withdrawals from your retirement savings once you reach age 72. Roth IRAs are free of RMDs, providing you with more control over your retirement savings.
• Tax-free withdrawals in retirement. When you roll over a traditional 401(k) into a Roth IRA, you’ll probably end up paying some taxes on the amount you’re converting. But these taxes may be less than what you’d pay if you took regular withdrawals from a traditional 401(k) in retirement.
• Access to additional death benefits. Because there are no lifetime distribution requirements, you can pass down your Roth IRA to your heirs—although beneficiaries need to draw down the account within 10 years.
Henderson cautions that you must be aware of the immediate tax consequences when you roll your money from a 401(k) to a Roth account, however.
“If you’ve received a tax benefit for your 401(k) contributions, you need to make up for that when you roll into a Roth, which is funded with after-tax money. You might owe a hefty tax bill today, so make sure you’re prepared,” Henderson says.
Should You Roll Over Your 401(k) into Another 401(k)?
There are some situations that might make an IRA rollover the wrong move for you. Here’s what to consider before completing a 401(k) rollover.
• Retirement account protection. In general, 401(k) accounts offer better protections from creditors than IRAs.
• Rule of 55. With a 401(k), you can actually start withdrawing funds at age 55 penalty-free if you leave your job. You don’t have that advantage when you roll your 401(k) to an IRA, though you can emulate it by taking subsequently equal periodic payments (SEPPs) from your IRA.
• Performance. If you like your current plan, and it’s performing well, there’s no reason to complete a rollover.
You can always choose to roll your old 401(k) balance into your new employer’s 401(k) plan. If you value the simplicity of having everything in one place, you like the features of the plan at your new job or you want to maintain the legal protections of a 401(k), it may make more sense to roll your old 401(k) into a new 401(k).
How to Roll Over Your 401(k) to an IRA
If you’re ready to make a 401(k) rollover to an IRA, here’s how to make it happen.
1. Choose Your 401(k) Rollover Destination
Consider whether a traditional IRA or Roth IRA makes the most sense for your 401(k) rollover.
• 401(k) Rollover to Traditional IRA: If you want to maintain the same tax treatment, this can be a good choice, Henderson says. You avoid extra hassle, and you just see the same RMD and tax treatment as you would with your current 401(k).
• 401(k) Rollover to Roth IRA: For those with high incomes, the 401(k) rollover to a Roth IRA can serve as a backdoor into a Roth tax treatment. But “don’t forget about the taxes,” Henderson says. In addition, remember the five-year rule when it comes to Roth accounts: Even at 59 ½, you cannot take tax-free withdrawals of earnings unless your first contribution to a Roth account was at least five years before. Those close to retirement, therefore, may not benefit from this type of conversion. “Talk to a tax professional if you’re rolling into an account with different treatment,” says Henderson.
2. Pick an IRA Provider for Your 401(k) Rollover
When moving your money, you need to figure out which brokerage will provide you with the services, investment offerings and fees you need. If you’re a hands-on investor who wants to buy assets beyond stocks, bonds, ETFs or mutual funds, you need to look for a custodian that will allow you to open a self-directed IRA. On the other hand, if you’re more hands-off, it might make sense to choose a robo-advisor or a brokerage that offers target date funds.
3. Contact Your Current 401(k) Provider and New IRA Provider
Ideally, you want a direct rollover, in which your old 401(k) plan administrator transfers your savings directly to your new IRA account. This helps you avoid accidentally incurring taxes or penalties. However, not every custodian will do a direct rollover.
“In many cases, you’ll end up with a check that you need to pass on to your new account provider,” Henderson says. “Open your new IRA before starting the rollover so you can tell the old provider how to make out the check.”
The goal, Henderson says, is to avoid having to ever put the money into your personal bank account.
“You only have 60 days to complete the transaction to avoid it being a taxable event, and it’s best to have everything set up before getting that check,” Henderson says.
4. Continue Regularly Investing
Keep up your good investing habits and continue building your retirement fund. Remember, though, that IRAs have smaller annual contribution limits than 401(k)s. Your transferred balances, however, don’t “count” toward your annual limits, and you can contribute to any new employer retirement plans as well as your IRA to maximize your contributions.
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Frequently Asked Questions (FAQs)
Are You Charged Fees For An IRA Rollover?
In many cases, you are not charged any fees to roll over your money from a 401(k) to an IRA, but check with your old 401(k) provider to make sure.
Is There A Limit To How Much You Can Roll Over From A 401(k)?
No, there’s no limit on how much money you can move in a 401(k) rollover.
Are There Any Downsides To 401(k)-To-IRA Rollovers?
You might lose some protection against creditors. Additionally, you forfeit the ability to access 401(k) money penalty-free if you separate from your employer at 55 or older. You can, however, still access money for certain eligible purchases and life events, regardless of whether it’s in a 401(k) or IRA.
Are There Tax Implications Of IRA Rollovers?
Depending on how you move your money, there might be tax implications. If you move your money into an account with the same tax treatment as your old account, there shouldn’t be issues as long as you deposit any checks you receive from your 401(k) into a tax-advantaged retirement account within 60 days. However, if you move a traditional 401(k) into a Roth IRA, you could end up with a tax bill. Check with a tax professional to find out how you may be affected.
What Happens If You Cash Out Your 401(k)?
If you take your 401(k) money before you reach age 59 ½, you might have to pay taxes at your regular tax rate, on top of a penalty from the IRS, on any money that hasn’t been taxed before. You may be able to avoid any penalties for certain life events or purchases, but you’ll still probably owe taxes on any previously untaxed money.
How Long Do I Have to Roll Over A 401(k) From A Prior Employer?
There is no time limit. However, 401(k) rollover rules only give you 60 days to move your money once you’ve received a check from your old 401(k) provider.
Do You Have To Roll Over Your Old 401(k)?
No, but if your balance is less than $5,000, your old employer may require it.
How Much Can I Contribute To A Rollover IRA?
IRA rollovers do not affect your ability to contribute to an IRA. In 2022, you can contribute up to $6,000 ($7,000 if you’re 50 or older). In 2023, that limit increases by $500 to $6,500 ($7,500 if you’re 50 or older).
Can I Have More Than One Rollover IRA?
Yes. However, new contributions to all of your IRAs are cumulative. This means you can contribute a max of $6,000 ($7,000 if 50 or older) across all of your IRAs in 2022. In 2023, that limit increases by $500 to $6,500 ($7,500 if 50 or older).
