How To Do a 401(k) Rollover From a Previous Job

401(k) planning, financial planning, Gold Wealth Family Wealth, Westport, Connecticut

By Michael Gold, CFP®, MBA Founder & CEO – Wealth Advisor

A big question I get all the time is, “What do I do with my old 401(k) and can I roll it over from my previous job?” The short answer is: yes, you can. When you leave a job after making pre-tax contributions to a 401(k) plan, there are several ways to roll the funds into new investments and avoid the 10% early withdrawal penalty.

If you move to a new job that offers a 401(k) plan, you can roll your funds into your new employer’s plan upon becoming eligible. Additionally, you can roll your funds into your IRA, or you may even be able to leave the money in your former employer’s plan.

Let’s look at the different strategies and approaches on how to do a 401(k) rollover.

So, What Actually Happens When You Leave Your Job?

Your 401(k) balance will affect your options post-separation. If you have accrued less than $1,000 in your account, your employer can cut you a check and forcibly close the retirement account. If this happens, you must deposit the funds into an IRA account within 60 days to avoid a penalty (known as an “indirect rollover”).

There is one catch: Your employer will be required to withhold 20% from the check. In this scenario, if you want to move all the money into the new retirement account, you will need to replace the 20% from another funding source, such as a personal savings account.

If your account contains between $1,000 and $5,000, your former employer can move the funds into a different IRA account at the employer’s discretion.

If your account contains more than $5,000, your employer must leave your retirement account as is, unless you elect to withdraw the funds or roll them to a new account.

What If You Have an Outstanding 401(k) Loan?

If you borrowed money from your 401(k) while you were still employed, any balance on that loan will typically need to be repaid within 60 days. Otherwise, the unpaid balance will be considered “offset” or treated as a distribution (subject to taxes and penalties).

If you find yourself in this situation and elect to roll your 401(k) balance to a new retirement account, you have the option of making up the unpaid balance from another source. For instance, if you have $20,000 in your 401(k) and owe $1,000 on a loan, you can directly transfer the $20,000 balance to an IRA and make an additional deposit of $1,000 to the new retirement account, provided you meet the applicable deadline.

Roll Funds to a New 401(k) Plan

Most employers limit eligibility for participation in 401(k) plans to employees with a given length of service and only allow enrollment at specific times during the year (“entry dates”), similar to your last employer (although your new employer’s eligibility plan requirements may differ).

Until you meet the eligibility requirements for the new plan, you will not be able to move the funds over. Once eligible, your investment options in the new 401(k) are limited to those allowed within the new plan.

Roll Funds to Your IRA

Another option for how to do a 401(k) rollover is to roll your old 401(k) into your IRA. For many, this provides even greater flexibility and choice. 401(k)s have tremendous benefits, but the investment options are typically limited to a few planets in the investment universe. In all likelihood, you have the choice of a handful of mutual funds representing some equity funds and perhaps a bond fund or two but that is it.

In contrast, IRAs open a larger universe of investment choices, to name a few, most types of investments are available to you, not just mutual funds, but also individual stocks, bonds, and exchange traded funds (ETFs), as well as professionally managed portfolios if you have access.

Another perk of IRAs is that you can also buy and sell your holdings anytime you want. Most 401(k) plans limit the number of times per year you can rebalance your portfolio and/or restrict you to certain times of the year.

401(k) To Roth IRA Conversion

Yet another option is to convert funds from a 401(k) plan to a Roth IRA. This option requires paying taxes upfront on the converted funds since a Roth IRA is not tax-deferred (as opposed to a traditional IRA).

The tax bill could be substantial, as all of the money will be taxed as if you just earned it in the current year—remember that when you contribute to a 401(k), you do so with pre-tax earnings. In some cases, it may be possible to alleviate the immediate tax impact by moving a portion of the funds to a traditional IRA, but specific rules and limits apply.

Can You Take Distributions?

Your 401(k) or 403(b) account is likely one of the most valuable assets you have, so it is essential to know when and how you can access it. These accounts are intended to help fund your retirement. There may be advantages to beginning to draw down your plan balance.

You can take penalty-free distributions if you meet one of the following conditions:

1. You are over 59 ½ years of age, or
2. You are over 55 years of age and leave your job during or after the calendar year in which you reached age 55.

In any case, if you are over 72 years old, you must begin taking required minimum distributions (RMDs). It is important to recognize that even if you meet the criteria for a “penalty-free distribution”, your distributions from your 401(K), 403(b) and/or IRA are all taxable events.

In terms of what truly benefits you the most, there is no general answer. Every financial plan and everyone’s situations are unique. Be sure to consult your tax professional and your financial/wealth advisor before starting down any of these paths to see what makes sense in your specific circumstances.

If you have recently left your job or expect to leave your job soon and you’re interested in how to do a 401(k) rollover, we at Gold Family Wealth are here to help. Please get in touch for a complimentary 15-minute introductory call, and we will be happy to go over your options with you.

Converting from a traditional IRA to a Roth IRA is a taxable event.


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About Michael

Michael Gold is the Founder and CEO, Wealth Advisor of Gold Family Wealth, an independent wealth management boutique and named one of the Top 100 People in Finance. Michael has 20 years of experience in the financial industry and has a bachelor’s degree in business and economics from the State University of New York College at Oneonta, an MBA from NYU Stern School of Business, specializing in Quantitative Finance and Leadership and his CERTIFIED FINANCIAL PLANNER™ (CFP®) credential. He serves business owners and entrepreneurs by stress-testing their financial plan to identify red flags and missed opportunities. Michael strategically outsources professionals from various fields, such as tax, insurance, retirement and trust and estate law to collaborate on potential solutions to help position his clients to pursue their desired goals.

Michael currently lives in Westport, CT. When he is not working, you can find him spending time with his wife, Giselle, their three children, Sebastian, Aria, and Pierce, and their dog, Charly. To learn more about Michael, connect with him on LinkedIn.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Gold Family Wealth, LLC), or any non-investment related content made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Gold Family Wealth, LLC. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Gold Family Wealth, LLC is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the Gold Family Wealth, LLC’s current written disclosure statement discussing our advisory services and fees is available upon request. If you are a Gold Family Wealth, LLC client, please remember to contact Gold Family Wealth, LLC, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services.
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