Here’s how to roll over your 401(k)

Changing jobs is exciting, but there are some practical things you have to deal with, like what to do with your old 401(k) plan.

You have the option of leaving your funds in your old 401(k) plan, but there are a few downsides to doing that: You can no longer contribute to it and you’ll have multiple 401(k) plans floating around you need to keep track of.

Here are two alternatives to leaving your money with your old company:

1. Roll over your 401(k) to your new employer’s plan

Assuming your new employer’s plan accepts rollovers, and if your new employer has a 401k plan, rolling over your old 401k into your new plan is one choice. Your money will continue to grow tax-free and you won’t be taxed for the rollover. However, there are a few things to consider before you head down this road.

How high are the 401k fees for your new employer’s plan? It may not sound like a big deal, but fees eat into your savings. The higher the fees the worse it is. Which is why most people are better off choosing the next option.

The second thing to consider is the investment choices the new 401k offers. Let’s face it, not every employer has a great 401k plan. Some have plans that offer a range of investment options and others barely cut it. Maybe you’d rather have your money in stocks and bonds, or a fund family that isn’t offered by your current plan. If this is the case, then rolling your 401k into an IRA is a better choice.

2. Roll over your 401(k) to an individual retirement account (IRA)

If you aren’t happy with the investment choices offered by the new plan or the fees are high, you can move your 401(k) into an IRA or Roth IRA. This is a great alternative because IRAs typically have lower fees and more investment choices.

With a traditional IRA, you contribute pre-tax dollars and let that money grow tax-deferred over time. You’ll pay taxes on your contributions (and investment gains) only when you withdraw the money, which you can do starting at age 59½. If you withdraw before then, you’ll have to pay a penalty fee.

With a Roth IRA, contributions are taxed when they’re made, so you can withdraw the contributions and earnings tax-free once you reach age 59½. There is an income cap on the Roth IRA: Only married people earning less than $189,000, or single people earning less than $120,000, are allowed to make the maximum yearly contribution of $5,500 (or $6,500 for people aged 50 or older).

 

You have two options when it comes to rolling over your money, a direct rollover or an indirect rollover.

With a direct rollover, your 401(k) funds move straight to your new account and the money never passes through your hands. The indirect rollover is the opposite, and there are potential chances of severe tax consequences.

When switching jobs, you never want to withdraw the balance of your 401(k) instead of moving it. Cashing out before age 59½ incurs a 10 percent early withdrawal penalty. (An exception to this rule is if you lose or leave your job at age 55 or later. In that case, you won’t have to pay the 10 percent penalty.) Plus, you’d be reducing how much money you’ll have for your own retirement.

Lastly, there’s a new rule intended to protect you. Rolling over a 401(k) has long been a routine financial transaction for many advisors and firms, but a few financial advisors talked savers into moving money from a low-fee 401(k) to a high-fee IRA. A new government regulation that takes effect in 2017 will require anyone who provides investment advice on a rollover to be considered a fiduciary. In other words, the advisor needs to be working in their client’s best interest rather than making recommendations based upon the commission or other reward they could receive.

However, even with the new rule, workers should take the time to do their own diligence about whether to roll over a 401(k) and, if so, where to move that money. A 401(k) or IRA is a key component to a comfortable retirement. While consulting with an expert may be helpful, don’t leave all the decisions about your money to someone else.

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