We may have covered the basics of 401k matching and various other services-- but what's a 401k rollover and how does it work?
A 401k rollover typically happens when you leave a job, retire, or switch over to a new long-term investment account. When you make a change, you have to decide what to do with your money.
How does a 401k rollover work?
When you decide to move money from a 401k to another account, such as an IRA or a different investment alternative, the process is known as a rollover.
The first step of a rollover is to decide which type of account you plan to transition your investment funds into. If you choose an IRA, for example, you’ll then need to decide who will safeguard your investment. Common options include a bank, brokerage, or online financial advisor.
Most people decide where to put their IRA based on associated fees. Some institutions charge as much as one or two percent of your portfolio for management and administrative work. Online plans typically have lower fees, which prevent investment costs from deducting your savings. It’s not uncommon to find exchange-traded funds with annual costs of .10-.15 percent or lower. Do your research before choosing an institution to rollover your 401k.
401k holders should also consider the quality of investments in their 401k compared with an IRA and the rules of the plan at their old or new job. Your individual situation and the rules of the plan will dictate if it’s smarter to leave your money where it is or roll it over.
How long do you have to rollover a 401k?
One typically has 60 days to complete a rollover. There are two ways to conduct the transfer, including a direct rollover and an indirect rollover.
A direct rollover involves electronically moving funds to a new account, such as an IRA. An indirect rollover occurs when the account holder secures possession of the funds before depositing them into a new account. Individuals choose this option when they have additional plans for the investment aside from keeping the lump sum in a retirement account.
After 60 days, you’ll face taxes and penalties. Direct rollovers are typically recommended as they are the fastest and safest way to make the transition.
If you’re thinking about rolling over your 401k, you can only use the 60-Day Rollover Rule once a year. Make sure you have a clear plan before making the switch.
Can you roll a 401k into an IRA without penalty?
Most brokerage firms don’t have rollover penalty fees to transfer a 401k to an IRA. This typically remains true when plan holders make withdrawals as well. Keep in mind there may be a waiting period to access a new IRA. Depending on the institution, the time frame isn’t usually more than a few weeks.
Also, the funds that are withdrawn early from an IRA are considered taxable income. So if you decide to make a withdrawal, consider the tax implications.
Can you rollover a 401k without leaving your job?
Contrary to popular belief, you can roll over a 401k without leaving your job. Employees consider transferring funds for several reasons. Common considerations include ease of money management, savings on fees, and better access to low-cost investment options.
Talk with a financial advisor to decide if a rollover is right for you.