Are you changing jobs soon and wondering what to do with your 401(k) plan?
While it can be a bit tricky to roll over your 401(k) plan to a new job, it can also be a smooth and straightforward process with the right guidance.
Here are three options for a successful 401(k) rollover.
What is a 401(k) rollover?
A 401(k) rollover is the process of transferring the funds in your old employer’s retirement plan to a new employer’s 401(k) plan or an IRA. The process involves moving your retirement savings from one account to another without incurring taxes or penalties.
Rolling over your 401(k) plan to a new employer’s plan can help you avoid the hassle of managing multiple retirement accounts, simplify your financial life, and help you make better investment decisions.
Option 1: Direct rollover
If you decide to roll over your 401(k) plan to your new employer’s retirement plan, the first step is to contact the 401(k) administrator at your new company.
The administrator will give you the necessary forms and instructions that you need to complete the process. The 401(k) administrator will also provide you with the new account address, and the money will be transferred directly from your old plan to the new one. This is called a direct rollover. It transfers the entire balance without taxes or penalties.
Option 2: Direct trustee-to-trustee transfer
A simpler option is to perform a direct trustee-to-trustee transfer where the majority of the process is completed electronically between plan administrators.
Once you contact your new employer’s 401(k) administrator, they will provide you with the necessary paperwork to initiate a trustee-to-trustee transfer. You need to complete the forms, and the plan administrators will handle the rest of the process.
One of the advantages of a trustee-to-trustee transfer is that you do not need to worry about receiving a check from your old employer or depositing the money into your new 401(k) plan within 60 days since the entire process is done electronically, and the funds are transferred directly from one plan to the other. This ensures that you do not incur any taxes or penalties during the transfer.
Option 3: Indirect or 60-day rollover
Another, but riskier option is an indirect rollover. This involves receiving a check made out to your name from your old employer. You then have 60 days to deposit the remainder (or make up the difference) in your new company’s 401(k) plan.
The main disadvantage of an indirect rollover is that you need to deposit the money into your new 401(k) account within 60 days. Otherwise, you may incur taxes and penalties.
Moreover, if your old employer withheld taxes from the check, you need to come up with the withheld amount from your pocket to avoid penalties.
If you fail to deposit the funds within 60 days, you may also lose a significant portion of your retirement savings.
Don’t forget to contact the 401(k) administrator at your new company for more information on the rollover process.
You may also schedule a call with us to learn more about 401(k) rollovers!
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Gary Gainspoletti, CPA, CFP®, Russell Gainspoletti, CPA, CFP®, or Brandyn Skeen, CFP®, and not necessarily those of Raymond James.
Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty.
Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the certification marks CFP® , CERTIFIED FINANCIAL PLANNER™, and CFP® (with plaque design) in the U.S., which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.