How To Rollover Your 401K

Whether you’re leaving your job or recently lost it, one of the most important things to consider during this transition is: what becomes of your 401(k)? If you’re not of withdrawing age (55) and won’t be returning to that employer in the foreseeable future, then you might want to consider a 401(k) rollover. This is basically the transfer of funds from your old 401(k) to your new employer’s 401(k) or an IRA account.

With your retirement funds at stake, this is not a decision that should be taken lightly – but it should also not become so overly complicated that you leave the funds in your old employer’s 401(k) plan to avoid dealing with the transition process. As with anything involving finances, there are advantages and disadvantages to both leaving funds where they are and going through with the 401(k) rollover into a new account.

How To Rollover A 401K

First and foremost, make sure your account is eligible for a rollover, then have your broker send you the forms that you’re required to fill out prior to transfer. Each provider has different rules and regulations regarding rollovers, so be sure to get all the forms necessary to initiate and complete the 401(k) rollover into your new 401(k) or IRA.

Also be sure to check your new provider’s requirements – may be as simple as a few forms to create a new account or a more extensive process, depending on where you open the new account. Nonetheless, make sure to ask plenty of questions to make sure there are few, if any, hitches along the way. 401(k) rollovers don’t have to be complicated processes, and provider representatives are there to help facilitate that process.

Best Discount Brokers For A 401K Rollover

If you are rolling over your 401K into an IRA account, then the following companies are some of the best brokerage firms to consider:

Pros and Cons of Rolling Over A 401K

Advantages. One of the biggest advantages to rolling over into an IRA is that you have greater flexibility over which investments you partake in and which ones you avoid. Brokerage accounts give you greater access to other investment options, such as Exchange Traded Funds (ETFs), which have low costs attached and can be relatively easy to trade.

Other investment options with an IRA include: stocks, bonds, mutual funds, CDs, and more. You can’t get that kind of flexibility with an employer’s 401(k) plan, so if flexibility is important to you, particularly when it comes to controlling your retirement funds, a 401(k) rollover into an IRA is the way to go.

Another advantage to 401(k) rollovers is that, if the entire rollover is completed in a single year, there is an IRS provision called the Net Unrealized Appreciation (NUA) that applies to the appreciation value of your company’s stock due to either company match, personal contributions, or both. If invested properly, the NUA provision can lower your tax rate on company stock.

If rolled over into an IRA, you will be taxed at the usual rate, but if you move your company shares into a taxable account and the rest of your 401(k) funds into an IRA or new employer’s 401(k) plan, your growth from the original value of the company shares will be taxed at the capital gains rate.

This strategic move means you’ll be taxed at a lower rate, but first ensure that you’re eligible for a 401(k) rollover and that you won’t incur penalties by withdrawing early (before age 55). Also note that using the NUA provision is not advantageous if your stocks’ value has increased only minimally or has lost value over the years (in these cases, it’s generally better to rollover your 401(k) into a traditional IRA).

Disadvantages. There are, of course, some disadvantages to moving from your former employer’s 401(k) to another 401(k) plan or IRA. For instance, what if status quo is fine? Your plan has few added expenses, it’s managed adeptly, and has an impressive array of investment options….in these cases, it might be preferable to keep your current 401(k) instead of rolling it over into a new employer’s 401(k) plan or IRA.

You also miss the opportunity to make early withdrawals if you rollover from a 401(k) into an IRA. With a 401(k), you may, without the 10% penalty, take distributions starting at age 55 (well before the 59 ½ norm). However, this benefit goes away once your funds are rolled over into an IRA.

There is also the protection of ERISA to consider; ERISA an acronym for Employee Retirement Income Security Act overseen and enforced by the United States Department of Labor. In case of personal bankruptcy, creditors cannot access your 401(k) account, though IRAs are not guaranteed these same protections. If financial instability is a concern as you close in on your retirement years, it may be preferable to leave your 401(k) plan intact.

Final Word

The process of rolling over your funds from your old 401(k) to your new employer’s 401(k) plan or your new IRA seems complex initially, but with research, proper planning, and all the correct forms filled out, it’s much easier than you realize.

Of course, it’s important to mention that 401(k) rollovers aren’t the perfect solution for everyone’s situation; for those who are happy with their current 401(k) plans or don’t want to lose some of the benefits provided by 401(k)s and not IRAs, perhaps you should stay with your previous employer’s 401(k) plan. Otherwise, consider the pros and cons and, after weighing your decision, roll over your funds into a new, more flexible account.