Rollover 401(k) to IRA

Rollover 401(k) to IRA

Most people should consider moving their retirement plan (e.g., 401(k), 403(b), SIMPLE IRA ) to another investment custodian upon separation with an old employer. This process is called a rollover and can have some confusing tax issues and other decisions that will need to be made upon leaving an old employer. This guide is a summary of some of the most important considerations when doing a rollover from a 401(k) to another account.

Should I rollover my 401(k) to an IRA?

There are some significant benefits to moving your 401(k) after separation from an employer. You usually (but not always) have the option of leaving the plan with the company your employer chose to manage your retirement plan. However, most employer retirement plans have very limited options for fund choices, have extremely high mutual fund fees, and can even use insurance products like annuities with additional fees. If you move your assets to an IRA (Individual Retirement Account), you will have complete control to invest in almost any type of asset in the world, including stocks, bonds, ETF’s, mutual funds, Real Estate Investment Trusts (REIT’s), CD’s, or money market accounts.

Every employer retirement plan is set up differently, so you will need to evaluate the details of your specific plan before deciding. For most people, benefits include greater control of the assets, consolidation of accounts, availability of a wider range of better and cheaper funds, lower fees, and more flexibility. Consolidating your accounts allows for easier monitoring, viewing performance holistically, one tax document instead of many, and generally just simplifies your investment tracking.

What are my rollover options?

Should I rollover my 401(k) to new employer?

Rolling over to your new 401(k): Some 401(k) plans allow you to rollover your older 401(k) plans directly into them. While this won’t get you many of the benefits of an IRA described above, your new plan might have better fund choices and lower fees compared to your old one. In addition, if these are your only investment accounts, you will be able to consolidate and track them together. Keep in mind that many employer plans don’t allow this option.

Rolling over to a Rollover/Traditional IRA: A rollover IRA is a type of traditional IRA that allows you to move the assets back into another employer plan if you decide you want to consolidate later. If you have a traditional 401(k) you will want to move your assets to a traditional IRA to avoid any tax implications.

Rolling over to a Roth IRA: The Roth assets in your 401k should always be transferred to a Roth IRA. In some 401(k) plans your assets can be split so some contributions are Roth and others are traditional. In these instances, you’ll want to rollover the traditional assets to a traditional IRA and the Roth assets to a Roth IRA. You do have the option of rolling over your traditional retirement plan to a Roth IRA, but it would function as a Roth conversion, which means you will owe income taxes based on your tax bracket at the end of the year. Traditional 401(k)’s are funded with pre-tax dollars, and Roth is after tax dollars, which means you’ll be on the hook for income taxes if you do this.

Direct vs Indirect Rollover: Depending on the rollover paperwork for your old employer, you might have a choice between a direct rollover (sometimes called a “direct transfer”), and an indirect rollover. In a direct transfer, the check is made out to the new investment custodian of your new IRA or 401(k) and sent directly to them. In an indirect rollover the check is made out to the employee, and you have 60 days to deposit the assets into a new plan. If the assets aren’t deposited into a new retirement plan within the 60-day window, you will owe income taxes and possibly a penalty if you’re under 59.5 in age. Indirect rollovers are generally not a good idea, and at Arrow we always suggest direct transfers are the best option.

**A distribution is NOT a rollover. If you take a distribution from your retirement plan, it means you’re withdrawing cash out of the plan, and you might owe taxes and penalties depending on your age and the plan details.**

Do I have to pay taxes when I do a rollover?

Direct transfers to “like kind” (traditional to traditional; Roth to Roth) accounts are not taxable, but a transfer from a traditional 401(k) to a Roth IRA is taxable. Indirect rollovers are taxable if they are not deposited within the 60-day window. Keep in mind that some 401(k) companies will also charge a small “separation fee” when you transfer your assets out of their custody.

How to do a rollover to an IRA

Most companies require withdrawal or rollover paperwork to complete the transfer. You will need to have a new retirement account set up at your new brokerage or financial institution prior to doing the rollover. On the separation paperwork, you will normally provide the address of the receiving institution, your account number of the rollover account, whether or not taxes should be withheld, and possibly signatures from your previous employer’s benefits office, or a letter of acceptance from the receiving company. We suggest consulting with a financial planner to make sure the process is done correctly.