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Apache is functioning normally

December 6, 2023 by Brett Tams

What should you do with your 401k or 403b when you leave your job? This is a question that confronts more and more people. According to the Department of Labor young Baby Boomers held on average 11.3 jobs from age 18 to 46. So it was no surprise when I received the following email from a reader named Juan:

In this article, we’ll look first at your options. Then we’ll cover some factors to consider as you choose the best option for your circumstances. And finally, we’ll cover some of the mechanics of actually rolling over a 401k to another 401k or IRA. Note that this article applies equally to both 401k and 403b retirement accounts.

Listen to this Article:

Options for a 401k When You Leave a Job

The first thing is to understand are options. When you leave a job with a 401k or 403b you have potentially four options when it comes to your retirement plan:

Take the Money: While I include this as an option, it’s not one that will do your retirement planning any favors. Taking the money will trigger ordinary income tax. If you are not 59 1/2 or older (or otherwise able to take a qualified distribution), you may also get hit with a 10% additional tax. So while this is technically an option, I’m going to assume for the sake of this article that it’s not one you are considering.

Leave it Alone: Most 401k plans allow you to leave your money in the 401k at your old employer. You won’t be contributing to the account anymore, but you can continue to invest the money in the funds available in the plan. Note that this option may not be available for 401k accounts with balances of less than $1,000. For balances of less than $5,000, you may need to take steps to prevent your old employer from automatically distributing the funds to you.

Rollover to Current Employer’s 401k: If your new employer has a 401k or 403b and permits rollovers, you can rollover the money to the retirement plan at your new employer.

Rollover to an IRA: Finally, you can always rollover the 401k to an IRA.

Considerations in Making Your Choice

What should you consider in deciding which option is best for you? While there is no one right answer for everybody, there are some important factors to take into consideration. The very first factor is access to good investment options.

Investment Options

One of the big potential downsides of a 401k or 403b is that some of them have lousy investment options. For that reason, it’s important to consider the investing options at both your old employer and your new employer. Part of this evaluation should look at the expense ratios of the mutual funds in both plans. Also, keep in mind that you may not need every mutual fund choice in a plan to be a good option. As you build your asset allocation plan across multiple accounts, you may only need one or two good investment choices with your 401k.

If the investment options at the old employer are good and fit your asset allocation plan, leaving them there is a reasonable option. You don’t have to go through the hassle of moving the money. In fact, that’s exactly what I did with my first employer. I was there for 10 years. When I moved to another job, I left my money in the company’s retirement plan because I was happy with the investment choices.

Simplicity

The second thing to consider is simplicity. The fewer accounts you have, the easier it is to manage. That’s true when it comes to rebalancing a portfolio and keeping track of your investments. If you have good investment options at your new employer, rolling your account over from your old employer to your new employer minimizes the number of accounts you have. If you happen to have good investment choices at both your old and new employer, you’ll have to weigh the inconvenience of the rollover with the inconvenience of managing two accounts. In the long run, I favor the simplicity of consolidating accounts. Further, as we’ll cover in a moment, it’s not at all difficult to rollover a 401k.

Age 55 Rule

The third thing is the age 55 rule. This is one I think a lot of people tend to forget. If you leave your employer in or after the year you turn 55 you can begin to take withdrawals from your 401k without incurring the 10% penalty. What happens if you leave your employer at age 54? Can you wait a year until you turn 55 and then start taking money out without penalty? No. This exception only applies if you leave your employer in the year you turn 55 or later. Of course, you’ll have to pay ordinary income tax assuming it’s a traditional 401k or 403b.

So what does this have to do with a 401k rollover? The age 55 rule does not apply to IRAs. If you rollover a 401k to an IRA, you cannot take advantage of this rule. Therefore, you should consider this factor when deciding what’s best for your retirement account.

Rollover Tips

If you decide to rollover your 401k or 403b, you’ll want to use what’s called a direct rollover. A direct rollover is the movement of your investments from one plan directly to another plan. In other words, you don’t get access to the funds. A direct rollover is quick and convenient.

There is such a thing as an indirect rollover where you do touch the money. The money comes to you and you then have 60 days to roll it over into the IRA or 401k. There are several drawbacks to an indirect rollover. First, your old employer may withhold 20 percent of the rollover for taxes. While you’ll get that money back eventually, you’ve got to come up with that extra 20 percent now to roll over the whole amount into your new account. Further, if you fail to rollover the assets within 60 days, the IRS treats the assets as a distribution. The result can be a very big tax bill, including the 10% penalty.

Finally, the easiest way to begin the direct rollover process is to contact the new plan administrator where you want your money to go. They likely have an entire department dedicated to helping investors execute a 401k rollover. They will walk you through the paperwork and make sure everything is processed properly.

Where Should You Open an IRA?

If you’re going to open up an IRA, where do you open it? The key to answering this question is to decide first what types of investments you’ll purchase. For example, if you want to invest in funds at Fidelity, then it makes sense to open the IRA at Fidelity. That’s true if you want to invest in funds at any mutual fund company. If you have a certain fund company you prefer, open the IRA with the mutual fund company. Not only do you invest for free into their investment products, but you can always add a brokerage account to invest in stocks, bonds, or ETFs.

If you want to invest in a broad array of ETFs and stocks, then a low-cost brokerage makes the most sense. Brokers offer IRA accounts that enable you to rollover a 401k. TD Ameritrade is my personal favorite because trades are inexpensive and they have physical offices just about everywhere. I’ve also used OptionsXpress, which offers a $100 new account bonus. You may have a different broker you prefer, but if you’re going to trade a lot of ETFs and individual stocks, a low-cost brokerage is a good option for an IRA.

The fourth option, of course, is a robo-advisor. These tools take a lot of the work out of creating an asset allocation plan and rebalancing your portfolio in exchange for a fee.

Related: How to Build Your Own Benefits Plan If You Leave Your Job

Rob Berger is the founder of Dough Roller and the Dough Roller Money Podcast. A former securities law attorney and Forbes deputy editor, Rob is the author of the book Retire Before Mom and Dad. He educates independent investors on his YouTube channel and at RobBerger.com.

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Source: doughroller.net

Apache is functioning normally

May 30, 2023 by Brett Tams

The U.S. Bureau of Labor Statistics estimates that Americans change jobs about 10 times between the ages of 18 and 42. If job changers had a 401k account at just half of those positions, it would represent a significant money management challenge: multiple redundant investment portfolios and a mountain of account statements and investment documentation to sort through.

One flexible solution to simplify the task is to consolidate assets under a single account umbrella via a 401k rollover to IRA. Offered by many financial institutions, the rollover IRA can help you streamline your investments into a unified asset allocation plan. (Remember: In addition to 401k’s, this could also include 403b’s, 457’s, Pension Plans, Simple and SEP IRA’s)

If you enjoyed this article be sure to check out: How to Rollover Your 401k into a Roth IRA, Consolidate Retirement Assets with a Super IRA, How to do an In-Service 401k Distribution While You’re Still Working.

401k to Rollover IRAs Offer a Wide Range of Benefits

As compared with employer-sponsored retirement accounts, a rollover IRA can provide a broader range of investment choices and greater flexibility for distribution planning. Consider the following benefits rollover IRAs offer over employer-sponsored plans:

Simplified investment management. You can use a single rollover IRA to consolidate assets from more than one retirement plan. For example, if you still have money in several different retirement plans sponsored by several different employers, you can transfer all of those assets into one convenient rollover IRA.
More freedom of choice, control. Using a rollover IRA to manage retirement assets after leaving a job or retiring is a strategy that’s available to everyone. And depending on the financial institution that provides the rollover IRA, you could have a wide array of investment choices at your disposal to help meet your unique financial goals. As the IRA account owner, you develop the precise mix of investments that best reflects your own personal risk tolerance, investment philosophy and financial goals.
More flexible distribution provisions. While Internal Revenue Service distribution rules for IRAs generally require IRA account holders to wait until age 59½ to make penalty-free withdrawals, there are a variety of provisions to address special circumstances. These provisions are often broader and easier to exploit than employer plan 401k hardship withdrawal rules.
Valuable estate planning features. IRAs are more useful in estate planning than employer-sponsored plans. IRA assets can generally be divided among multiple beneficiaries, each of whom can make use of planning structures such as the stretch IRA concept to maintain tax-advantaged investment management during their lifetimes.In addition, IRS rules now allow individuals to roll assets from a company-sponsored retirement account into a Roth IRA, further enhancing the estate planning aspects of an IRA rollover. By comparison, beneficiary distributions from employer-sponsored plans are generally taken in lump sums as cash payments.

Efficient Rollovers Require Careful Planning

There are two ways to execute a 401k Rollover to IRA — directly or indirectly. It’s important you understand the difference between the two, because there could be some tax consequences and additional hurdles if you aren’t careful. With a direct rollover, the financial institution that runs your former employer’s retirement plan simply transfers the money straight into your new rollover IRA. There are no taxes, penalties or deadlines for you to worry about.

With an indirect rollover, you personally receive money from your old plan and assume responsibility for depositing that money from the 401k into a rollover IRA. In this instance, you would receive a check representing the value of the assets in your former employer’s plan, minus a mandatory 20% federal tax withholding. You can avoid paying taxes and any penalties on an indirect rollover if you deposit the money into a new rollover account within 60 days.

You’ll still have to pay the 20% withholding tax and potential penalties out of your own pocket, but the withholding tax will be credited when you file your regular income tax, and any excess amount will be refunded to you. If you owe more than 20%, you’ll need to come up with the additional payment when you file your tax return.

Potential Downsides of IRA Rollovers

While there are many advantages to consolidated IRA rollovers, there are some potential drawbacks to keep in mind. Assets greater than $1 million in an IRA may be taken to satisfy your debts in certain personal bankruptcy scenarios. Assets in an employer-sponsored plan cannot be readily taken in many circumstances.

Also, with a traditional IRA rollover, you must begin taking distributions by April 1 of the year after you reach 70½ whether or not you continue working, but employer-sponsored plans do not require distributions if you continue working past that age. (Roth IRAs do not require the owner to take distributions during his or her lifetime.)

Remember, the laws governing retirement assets and taxation are complex. In addition, there are many exceptions and limitations that may apply to your situation. Before making any decisions, consider talking to a financial advisor who has experience helping people structure retirement plans.

Source: goodfinancialcents.com

Apache is functioning normally

May 28, 2023 by Brett Tams

Remember the good old days of whistling while you work in regards to your 401k? Your company used to have a very nice match to your 401k. Your balance was at an all-time high and retirement seemed like just over the horizon.

Then 2008 came along and the whistling turned into more of a whimper. Don’t worry, I was whimpering, too. For those that are 59 1/2 and still working, I might have a reason for you to whistle again. The reason behind it is called the 401k in-service distribution.

I took a call from a client recently whose employer was getting ready to switch 401k providers again (3 times in the last 5 years) and was frustrated with the new investment options.

He is over 59 1/2 and had heard that he might be able to rollover his 401k to an IRA and also continue to fund his 401k. I was excited to share with him that he, in fact, could do this and that the procedure was called an in-service distribution.

Rules on 401k In-Service Distribution

First things first, you HAVE to be 59 1/2. No matter how much you dislike your current plan and you want to withdrawal it all, it’s not an option until then.
This doesn’t just apply to 401k’s. Any type of retirement plan will work, too. This includes 403b’s, 457″s and pensions, too.
Be sure to rollover the money to an IRA if you don’t need it. By doing a 401k in-service withdrawal you will be taxed.

Reasons to Do a 401k In-Service Distribution

An in-service distribution allows you to rollover your vested balance from your profit sharing plan to an IRA. You will have to determine first if you are eligible. Some plans may restrict from doing so. Here are some reasons that you might want to:

Control— Who doesn’t like control? With an IRA, you are the account owner and have more control over your assets, free from the restrictions your employer-sponsored plan can impose.
Diversification — Many employer-sponsored plans offer limited investment options. In contrast, most IRAs typically provide a wider range of investment choices across virtually every asset class. This flexibility can help you better diversify your retirement assets to meet your individual investment goals.
Beneficiary options — Typically, IRAs allow non-spouse beneficiaries to “stretch” an inherited IRA over their lifetimes. This type of beneficiary distribution option is not available in most employer-sponsored plans, which may limit distribution choices for your beneficiaries.

Disadvantages of 401k In-Service Distributions

With every advantage, there may be disadvantages. Please consider:

Age limitations — In qualified plans, the age 55 rule allows participants who stop working at age 55 or older to take distributions without the 10% IRS premature distribution penalty. In an IRA, you may not take distributions until age 59½. For this reason, if you plan to retire early, you may want to preserve penalty-free access to your retirement funds by not moving all of your 401(k) assets to an IRA before retirement.
NUA — Net Unrealized Appreciation (NUA) tax treatment is not an option for distributions from IRAs. Therefore, if you hold highly appreciated company stock in your employer-sponsored plan, the rolling of that stock to an IRA eliminates any ability you may have to take advantage of NUA tax treatment.
Creditor protection — While IRAs now have federal bankruptcy protection, other IRA creditor protection is still determined by state laws. Qualified plan assets continue to have broad federal creditor protection.
New contributions to your existing plan — Taking an in-service distribution may affect your ability to contribute to your employer-sponsored plan. Be sure to consult with your plan administrator before implementing this. Learn more here about Roth IRA contribution limits.
Cost — Fees related to having your own IRA could be more costly than the investment options inside the 401k.
After-tax dollars — After-tax dollars are generally segregated in a qualified plan, and can often be distributed separately. However, after-tax dollars complicate things if rolled to an IRA. If you move after-tax money into an IRA, that money becomes part of the non-deductible “basis” of the IRA and will not be separately accessible. To avoid paying tax again on your IRA “basis” when you take an IRA distribution, you must maintain careful records of the “basis” in your IRAs. This can become more of an issue in regards to doing a Roth IRA Conversion.

Where to Rollover

If you do not have a brokerage account already in place. These are the top providers to set up a rollover to an IRA:
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*Restrictions, penalties and taxes may apply. Unless certain criteria are met, Roth IRA owners must be 59 1/2 or older and have held the IRA for 5 years before tax-free withdrawals are permitted.

Source: goodfinancialcents.com

Apache is functioning normally

May 25, 2023 by Brett Tams

72 is a very good number

Ask any financial advisor about 72t and I’ll bet you’ll see them cringe.

It’s not a popular planning method, mostly because it comes with lengthy restrictions that, if violated, can lead to severe penalties.

Clients don’t like paying penalties. Advisors don’t like when their clients pay penalties. 72(t) has the potential if done wrong, for the clients to pay a huge chunk of penalties. See why we cringe about 72(t)?

Some of you may have no clue what 72(t) is. If you are not planning on retiring early (before the age of 60), then skip this post and come back another day. 🙂

If you are in the financial position to retire early and have a bulk of your assets in retirement accounts, then 72(t) may be of help to you. Let’s take a look at the 72(t) early distribution rules.

What in the Heck is 72(t)?

Most often when you take money from your retirement account before you turn 59 ½, you are assessed a 10% penalty on the top of ordinary income tax. One exception (others include: first-time home purchase, college tuition payments, disability) to that is a 72(t) distribution that is a “substantially equal periodic payments”.

Clear as mud? I thought so. Moving on……

Read more on How to Withdraw From Your IRA Penalty Free

How Does the IRS Consider 72(t)?

The IRS calculates your “substantially equal periodic payments” by using one of the three methods that the IRS has determined and then take your payment on a set schedule for a specific time period.

It is required that you take those payments for either 5 years or when you turn 59 1/2, whichever comes later.

For example, if you start taking your payments at the age of 52, then you must do so for 8 years. Someone who starts at 57, must do so till the age of 62.

72t tables

72(t) Real Life Example

In the 10 years I’ve been a financial planner, I’ve only executed 72(t) a handful of times. The concern is having to lock in your withdrawal rate for a minimum of 5 years is longer than most advisors are comfortable with- myself included.

Recently, I had a potential new client that was getting an early buyout from his job and was considering using 72(t) for a portion of his IRA. Here’s are some of the details (name and some of the data have been changed for privacy concerns).

Paul born 8/21/55 and $720,000 that he will receive in a lump sum distribution from his employer. He would like to do a 72(t) from age 57.3-62.3. He needs about $2,000 a month until 63.5 where he will have the remainder in an IRA. Paul also had $140k in his 401k.

How 72(t) Distributions Work

The 72(t) plan must not be modified until 5 years have passed from the date of the first distribution for those who will reach 59.5 before the 5 year period is completed. However, it is not clear whether Paul plans to take the 72t distributions from the employer plan or from a rollover IRA.

If the 72(t) plan is needed, the best approach is to do a direct rollover from the plan to a rollover IRA, determine what IRA balance is needed to generate 24k per year using the amortization plan, and then transfer that amount to a second IRA and start the plan.

The original rollover IRA can be used for emergency needs to prevent the 72t plan from being broken if he needs more money. Employer plans do not provide 72(t) support and may not offer flexible distributions. They also will not allow funds to be rolled back in the event too much is taken out due to an administrative error.

Note: that if Paul separated from service from the employer sponsoring the qualified plan in the year he would reach 55 or later, distributions taken directly from the plan are not subject to penalty, and a 72t plan could be avoided.

But for that to be practical the plan must allow flexible distributions until the 5 year period ends. If the plan required a lump sum distribution, even though the penalty would not apply, a distribution of 120,000 in a single year would inflate his marginal tax rate and that might well cost more than the 10% penalty.

If a lump sum is required, then a direct rollover to an IRA should be done before starting a 72(t) plan.

Some of you may be considering initiating 72(t) distributions. 72(t) distributions take careful planning and consideration.

Before you lock in those payments, there are some alternatives that you may want to explore:

72(t) Distribution Alternatives

Just because you can, doesn’t mean you should. Definitely look to see if there are other things you can (should) do first.

Here are a few examples.

Leave Your Job Early

If you leave your job January 1st of the year you turn 55 (50 for certain government agencies), you are allowed to pull out lump sum distributions out of your company retirement plan penalty free.

Notice I said retirement plan and not IRA. Once you roll over into an IRA, you lose out on that opportunity.

Consider leaving a portion of money in the retirement plan as a precautionary. Or you can just take a lump sum distribution out of the plan and pay the tax and park it in a high-interest savings account for emergency purposes. Do remember that you will pay ordinary income tax on that distribution.

Don’t Forget About After Tax Contributions

You can also tap into after-tax contributions to your 401k, non-deductible IRA contributions, or after-tax contributions to your Roth IRA. Consider these penalty-free options first prior to locking in your payments.

Net Unrealized Appreciation

Even a bigger secret than 72(t) is NUA. What is Noo-uhh you ask? Well, it is the acronym for Net Unrealized Appreciation. Get it yet? Didn’t think so. NUA pertains to employer stock that you have in your retirement plan that may have an extremely low cost basis.

You may be one of the lucky ones that started working for the company prior to them going public and you’ve seen your company stock double and split more times that you can count.

If you utilize the NUA on your stock you will just be penalized on the basis, not the total value of the stock.

For example, if you have company stock that is valued at $100,000 but your basis in the stock is only $20,000, you would be only penalized on the $20,000 if you took it early if you are under 59 ½.

The remaining gain ($80,000) would be taxed as a long term capital gain when you decided to liquidate it, not ordinary income. That could be the difference between 15% and 35% in taxes, depending on your tax bracket.

Warning! Once you roll over your employer stock into the IRA, you forfeit your NUA.

These are just a few of the alternatives that one can explore before committing to the 72(t) distribution rule.

The Final Call

The verdict is still out whether the client and I are going to do 72(t). Since he has a good amount in his 401k and his wife has a nominal 401k, as well (not mentioned above); I suggested using that money first.

Since he’s retiring early, he can avoid the 10% early withdrawal penalty so as long as the money is distributed from his 401k. Once you do a 401k rollover to an IRA, you lose that option.

Out of curiosity, I went to Bankrate.com and used their 72t calculator to see how much we could get with his retirement account. Below are some of those results.

72t calculator

Here’s a sample amount that one could withdraw from your IRA using 72(t). Note the interest rate of 2.48%. That amount was already entered in on Bankrate’s calculator.

You have the ability to choose your own interest rate but be careful. You want to choose a rate that is normal and sustainable based on current market and economic conditions.

Have you retired early? Would you be comfortable executing 72(t) distributions for 5 years?

Source: goodfinancialcents.com

Apache is functioning normally

May 23, 2023 by Brett Tams

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 their 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 easier. 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) rollover, be sure to seek counsel from a Certified Financial Planner™ professional.

Source: goodfinancialcents.com

Apache is functioning normally

May 2, 2023 by Brett Tams

By Peter Anderson 2 Comments – The content of this website often contains affiliate links and I may be compensated if you buy through those links (at no cost to you!). Learn more about how we make money. Last edited April 17, 2013.

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?

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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.

Source: biblemoneymatters.com

How to Roll Over Your 401(k) Into An Annuity

April 2, 2023 by Brett Tams

When you leave a job where you had a 401(k) itâs important to understand what your options are for rolling over your tax-advantaged plan. Cashing out is another option but can result in significant taxes. Many choose to roll their â¦ Continue reading â

The post How to Roll Over Your 401(k) Into An Annuity appeared first on SmartAsset Blog.

Options for a 401k When You Leave a Job

Considerations in Making Your Choice

Investment Options

Simplicity

Age 55 Rule

Rollover Tips

Where Should You Open an IRA?

401k to Rollover IRAs Offer a Wide Range of Benefits

Efficient Rollovers Require Careful Planning

Potential Downsides of IRA Rollovers

Rules on 401k In-Service Distribution

Reasons to Do a 401k In-Service Distribution

Disadvantages of 401k In-Service Distributions

Where to Rollover

What in the Heck is 72(t)?

How Does the IRS Consider 72(t)?

72(t) Real Life Example

How 72(t) Distributions Work

72(t) Distribution Alternatives

Leave Your Job Early

Don’t Forget About After Tax Contributions

Net Unrealized Appreciation

The Final Call

Cashing out is not the Best Option

Leave your 401k alone.

Transfer the 401k to a New Employer

You could roll your 401k into an IRA

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

What Are Your 401(k) Options When Leaving A Job

Reasons To Rollover Your 401(k) To An IRA

How To Rollover Your 401(k)

401(k) To IRA Rollover Conclusion

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