CompleteGuideTo401KTransfer

Complete Guide to 401K Transfer Options

Modern culture has modified the relationship between employer and employee, leading to an increase in job movement.Employers release staff through layoffs to accommodate changes in demand. As a business evolves, there is a need for different skill sets and talent to respond to the changes. Today, instead of hiring lifetime employees who remain with the company for an extended tenure, most workers switch companies multiple times in the course of a career.

Today, the average person changes jobs 12 times over the course of a career, significantly higher than previous generations. You might change jobs for a raise, new challenges, an improvement in the work environment to decrease stress, or achieve better work-life balance. Employment transitions often leave you wondering what to do with an old 401K.

The decision on where to house your 401K when you make a career move should not be a random decision.

There are a few options when you have a 401K at a previous employer.

Do Nothing. Most companies allow you to leave the 401K with the previous employer, provided you meet the minimum balance requirements. In this case, the account and investment choices remain unchanged.

The key advantages:

  • Inaction is the path of least resistance. If you have a good selection of investments, it could provide adequate growth and well-managed
  • You maintain the tax deferral benefit and pay fees based on the existing plan.
  • At any time, you can move the account to another plan.

The key disadvantages:

  • You may no longer contribute to the account.
  • Some employers restrict sales and movement across funds.
  • You may have limited access to the features available to current employees.
  • Company stock may be subject to taxation or require a vesting schedule.
  • You must repay all existing loans at the time of termination within 60 days. Failure to meet this deadline will result in the reclassification of any remaining loan balance as a distribution. At that time, you pay taxes and potentially a 10% penalty on outstanding funds.

Move the account to your new employer. Most employer plans allow you to roll over an existing 401K to the new company plan. When making the transfer, the 401k converts to cash, and you select investments available in the new plan. Plan costs, fees, and research tools vary across employers and could impact your decision to leave or transfer the account.

The key advantages:

  • Rolling over a 401K to your new employer will keep investment funds in one place, rather than managing multiple accounts.
  • A transfer preserves your ability to borrow against the account. Moving funds into an IRA forfeits the ability to borrow against account funds, making this a key advantage to transferring the account to your new job.
  • Delay taking minimum distributions at age 70 ½. While you work for a company, you may continue contributions and delay withdrawals beyond the 70 ½ age limit.

The key disadvantages:

  • Limited investment choices based on the employer plan.
  • Higher fees and expenses than most funds purchased in an IRA.

Roll over the account to an IRA. Making a direct transfer to an IRA account does not produce tax consequences. Your previous employer can wire funds directly to an IRA account, and, based on your needs, you have the choice of maintaining the same funds or choosing new investments.The other option is to receive a physical checkthat you must deposit into an IRA account within 60 days to avoid taxation and possible penalties. In some cases, employers deduct taxes from the funds. To prevent a taxable event, you must deposit the full amount, including any deducted taxes.

The key advantages:

  • More investment options. An Ira allows you to place funds in both traditional and non-traditional investments. You may choose CD’s, stocks, bonds, mutual funds, ETFs, real estate, and other investments not available through employer plans.
  • Housing previous 401Ks into one account can simplify account management.
  • The ability to choose lower cost funds. Due to the wider investment selection, you have better control over the fees and account charges. IRAs have a more transparent fee structure than 401Ks.
  • No tax consequences on transferred funds.

The key disadvantages:

  • You must consider account fees, broker fees, trading fees, and other costs to evaluate the true cost of an account.
  • Loans are not allowed on IRA accounts.
  • Fewer protections against creditors than 401Ks offer.

Convert funds to a Roth IRA. Transferring funds to a Roth IRA does initiate tax consequences when transferred from a traditional account. A conversion triggers taxation of the full amount as earned income. The benefit is you convert a tax deferred investment into a tax-free investment.

The key advantages:

  • Convert funds from tax deferred to tax-free.
  • No mandatory withdrawals at 70 1/2.

The key disadvantages:

  • Pay taxes on the conversion, which can raise your tax bracket in the year of the transfer.
  • No loans. Like traditional IRAs, you may not borrow against the account balance.
  • Fewer protections against creditors than 401Ks.

Qualities of All Retirement Accounts

All designated retirement accounts have either tax deferred or tax-free benefits. Traditional 401Ks or IRAs provide the benefitsupfront, as tax-deductible contributions and tax deferred growth. Roth 401Ks and IRAs do not provide an initial tax benefit, but the funds in the account grow tax-free.

Funds must remain in the account until age 59 ½ unless you meet one of the limited exceptions. Roth accounts allow for the removal of contributions at any time, with gains subject to the age limit. You must also own the account for five years before taking withdrawals.

Required minimum distributions in traditional accounts must begin at age 70 ½, except for funds held with a current employer.

Final Thoughts

401Ks provide a condensed number of funds to choose from, simplifying the process, whereas an IRA gives you thousands of choices.

Fees are another significant factor, as higher fees directly reduce rates of return and investing in lower fee funds could grow the account faster.

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