A 401 (k) is one of the best benefits a job can give you. Most companies offer a matching incentive and you often have a good range of funds to choose from.
But when you leave your job – whether it’s voluntarily or not – you can take your 401 (k) with you. (Yes, it’s still your money and so many people forget about that fun little sum of money when they’ve left an old job!) If you’ve already got another gig lined up, you may be able to rollover your old 401 (k) to your new company, if they also offer one. If you’re still unemployed, then you have an option to roll it over to an Individual Retirement Account (IRA). Either way, don’t leave money laying on the table since you’ve already worked for it!
If you can’t rely on your job’s HR department to help you out, here are more details on how to rollover your 401k:
Know What You Have
Most people still have the traditional tax-deferred 401 (k) while employed, which means they’re able to deduct their contributions from their taxes. For those people, they may be able to rollover their account into a traditional IRA or 401 (k).
But for those of you who have Roth 401 (k)s, you may be able to rollover your account to a Roth IRA or to your new company’s Roth 401 (k).
Make sure you find out what kind of account you have so you know what options you have for rolling it over. Educate yourself on your account so you don’t make any mistakes. It’s easier to ask and get clarifications instead of making a mistake during the process.
Choose the right IRA
IRAs often offer more investment options than company 401 (k) s. They tend to be a simple, tax-friendly way to save for retirement. You can think of an IRA as a basket of investments that can include mutual funds, stocks, bonds and annuities.
There are various types of IRAs that can help you grow your retirement savings faster and may provide tax benefits.
Contributions to Traditional IRAs may be tax deductible and taxes are deferred until you begin withdrawals.
Earnings from Roth IRAs and withdrawals in retirement are typically tax free. You can wait until you actually retire to withdraw money or use it for eligible expenses like buying a first home, subject to limitations.
A Rollover IRA is an option when you change jobs. It allows you to move your savings from your employer’s retirement plan into a tax-free, direct rollover IRA.
Before you choose a plan, do some research about your goals and what kind of investments can meet those goals.
You can also meet with a financial planner to see if you’re doing everything right to meet your retirement deadline. This is a good time to get a sense of how well your finances are doing and what you can change with your new IRA.
Choose a seamless transition
You may be able to keep your 401(k) with your old employer, says the Financial Industry Regulatory Authority (FINRA). You won’t be able to continue to make contributions to the plan (or receive a company match), but you may want to keep the plan if it has provided strong returns with reasonable fees. Talk to your old employer before you decide. A plus of this option is that you are still able to move your money to a 401 (k) or some other tax-deferred account at a later time, according to FINRA.
There are several ways you can transfer your old 401 (k) to your new job. The easiest and most recommended is to have your 401 (k)’s trustee transfer it directly to your new trustee (whichever company you’ve chosen for your IRA or new 401k).
That limits the tax issues and you won’t have to withhold an amount for your taxes. Make sure to tell your plan administrator that you want a direct rollover, so they don’t send you a check for the amount. Otherwise, you’ll then be responsible for putting that money in your new account and will have to withhold a percentage for your taxes (you’ll get it back when you file your yearly return).
If you are sent a check, don’t wait too long to deposit the check or you may face tax penalties and fees. Indirect rollovers have to be completed in 60 days. Plus, some people get tempted to cash out once they see how much money they have in their account. If you cash out you’ll not only be cashing out money you had designated for retirement, but you’ll also be taking a big tax hit on the funds. Your employer will have to withhold 20 percent as an “early tax payment,” and, depending on your age, you may also face a 10 percent early-withdrawal penalty from the IRS, and additional taxes from federal, state and local authorities.
Doing a trustee-to-trustee transfer takes all the work and worry out of your hands.
What happens if you don’t roll over?
You don’t have to necessarily roll over your 401 (k), but most experts recommend it.
Having your retirement accounts current and easily accessible means you’re more likely to care and keep up with your portfolio.
There are usually plan administrators who can help you with the rollover process. Don’t hesitate to call them and ask for help if you need it.
This post was written as part of the Allstate Influencer Program and sponsored by Allstate. All opinions are mine. As the nation’s largest publicly held insurance company, Allstate is dedicated not only to protecting what matters most–but to guiding people to live the Good Life, every day.
Please note that Allstate Life Insurance Company or its agents and representatives cannot give legal or tax advice. The brief discussion of taxes on this page may not be complete or current. The laws and regulations are complex and subject to change. For complete details consult your attorney or tax advisor.