Retirement Planning

How to transfer a 401(k) to a new employer

If you decide to leave your current job, you will need to decide what to do with the money you have invested in your current company’s 401(k) plan. Options often include leaving it where it is, transferring it into a new employer’s plan, or opting for an IRA rollover.

If you’re changing jobs, here’s what you need to know about transferring funds to your new employer’s 401(k) plan and other options.

key takeaways

  • Before rolling your 401(k), compare plans between your old and new employers.
  • It is better to choose direct versus indirect flipping.
  • If you choose not to roll over your 401(k), you can keep the funds in your old plan or choose to roll over your IRA.

Compare company plans

Even if your company provided guidance on your 401(k) plan when you were hired, you may find information about rollovers oddly lacking. In most cases, the good news is that the timing of the rollover funding decision is flexible. You can act immediately after you leave, or you can postpone it.

In fact, the latter is probably the best. “It’s better to wait, investigate, and then decide to transfer,” said Elliott Ford, an investment advisor at Ark Financial in Arlington, Washington, serving organizations across the country as brokers and retirement plan advisors. “Often the new company people can help you understand the new company’s investments, fees and plan terms.”

Ford recommends comparing the program’s return on investment and spending history. “Expenses are especially important. Numerous studies have shown that, in addition to the amount you contribute, the biggest predictor of the size of your final investment reserve will be the expense ratio of the investment.” Some advertising and other operating expenses of the fund. “The impact on the fund’s net return could be significant,” Ford said.

It shouldn’t be difficult to find someone at your new company to help you compare your old plan to your new one. Most have dedicated people who provide information and are willing to answer questions about the 401(k) plan, Or have a handy helpline for plan administrators. After all, they want your money.

Transfer funds to a new employer’s 401(k)

While there is no penalty for keeping your plan with your former employer, you do lose some benefits. The remaining funds in the original company plan cannot be used as the basis for the loan. What’s more, investors can easily forget about investments left over from previous plans. “I have counseled employees who have accumulated two, three or even four 401(k) accounts over 20 years or more of work,” Ford said. “These are people who have little or no knowledge of their investments. How’s it going.”

For accounts between $1,000 and $5,000, your company must transfer funds into an IRA on your behalf if it forces you out of the plan.

Most companies allow you to roll over if you have at least $5,000 in your account. However, if the former employee does not respond to the notification letter within 30 days, the company can roll out accounts under $5,000 from the program.

For amounts under $1,000, federal regulations now allow companies to send you a check, triggering federal and state taxes, if applicable, and a 10% early withdrawal penalty if you’re under 59½.In either case, you can avoid taxes and potential penalties if you move your funds into another retirement plan within 60 days.

How a 401(k) Flip Works

If you decide to roll over your old account, please contact your new company’s 401(k) administrator for a new account address, such as “ABC 401(k) Plan FBO (in your name),” and give it to your old employer , the money will be transferred directly from your old plan to the new plan or sent to you by check (written to the new account address) that you will give to the new company’s 401(k) administrator. This is called a direct flip. It’s simple, and the entire balance can be transferred without paying taxes or penalties.Another simpler option is to perform a direct trustee-to-trustee transfer. Much of the process is done electronically between plan administrators, taking most of the burden off of you.

A riskier approach, Ford said, is an indirect or 60-day rollover, in which you ask your former employer to mail you a check in your name. The downside to this manual method is mandatory tax withholding — the company assumes you’re cashing out the account and needs to withhold 20% of your funds for federal taxes.This means that $100,000 in 401(k) reserves can be a check for just $80,000, even if your explicit intent is to move the funds into another plan.

You then have 60 days to deposit the remainder (or make up the difference) into the new company’s 401(k) plan to avoid tax on the full amount and possibly pay a 10% early withdrawal penalty. Even so, the $20,000 withheld must be reported on your tax return, which could push you into a higher tax bracket. Regardless, all 401(k) distributions must be reported on the recipient’s tax return. The old plan administrator should issue you a Form 1099-R.

For example, you requested a full distribution from your 401(k) with a balance of $55,000. Using direct rollover, $55,000 is transferred from your old work plan to your new work plan. If you are paid in an indirect rollover, $11,000 in federal tax is withheld and you receive a check for $44,000. For this distribution to be fully tax-deferred, you must deposit $44,000 from your 401(k) and $11,000 from other sources into a qualifying plan within 60 days.

rollover exception

With few exceptions, parts of the 401(k) may not be eligible for rollover. These include:

Transfer 401(k) to IRA

Transferring a 401(k) into an IRA is another option for those who don’t want to rely on the investment products of a new company’s 401(k) plan. Likewise, rollovers can be direct, direct trustee-to-trustee transfers, or indirect, assigned to account owners. But either way, once you start the process, it has to happen within 60 days.Be

Ford generally prefers to move money into a new company’s 401(k) plan, though: “For most investors, a 401(k) plan is simpler because it’s already set up for you; safer because 401(k) plans are carefully monitored by the federal government; cheaper because costs are spread among many plan participants; and offer better returns because plan investments are often reviewed for performance by investment advisors and the company’s 401(k) investment committee. ”

bottom line

Before deciding what to do with your old 401(k), learn about the options available to you. The biggest pitfall to avoid is not heeding the 60-day rule, which leads to taxes and potential withdrawal penalties. The next most common problem is ignoring old accounts. Following the steps above, neither of these will happen to you.

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