Last year, the number of US workers changing or losing their jobs was double the annual rate from the previous two decades, and employees have discovered how difficult rolling over 401(k) can be. Here’s why.
Rolling over a 401(k) means moving it from one account to another. If you have a 401(k) plan with an employer and you lose your job or change jobs, you’ll want to move it over to either a self-directed retirement account or into the plan of your new employer. The former employee’s burden to move the 401(k) falls. But as many people are finding out, it’s anything but easy.
As record numbers of workers in the US change or lose jobs, it has led to a trail of orphaned 401(k) retirement accounts, according to Bloomberg’s finance opinion columnist Alexis Leonidis. She points out that the problem lies in so many of the 401(k) providers offering different plans, which all operate under an assortment of rules. In other words, there are no uniform procedures for employees who wish to move their retirement savings.
Leondis advises that it’s best to move the money as a direct rollover, directing the funds straight into a new account rather than first going to the account holder. Doing it this way avoids having any taxes withheld. Even if a paper check is sent to the former employee, it should be payable to the new IRA (individual retirement account) custodian rather than being payable to the account holder.
You essentially have four options:
Naturally, this is only an option if your new employer offers a 401(k) plan. Still, you will need to consider whether your new employer’s 401(k) plan is best for you or whether your own IRA would be preferable. According to the Motley Fool, factors to consider are fees, available investments, or any other potential drawbacks.
ACCORDING TO INVESTOPEDIA, an IRA will give you the most control of your retirement funds and choices. What type of IRA you set up will depend on your situation and whether you are self-employed.
The downside of this move can be taxes and penalties depending on your age. You’ll be subject to a mandatory income tax withholding of 20%. Depending on your age, you could be charged a penalty for early withdrawal (10% penalty if you aren’t 59 1/2 or older).
Reasons to keep your 401(k) with your former employer could include good investment options and reasonable fees. Conversely, as an ex-employee, you might pay higher fees, and you can’t make additional contributions, according to nerdwallet.
If you took a loan from your 401(k), the loan is due when you leave your employer. If you are unable to pay the loan back when you depart, it will be considered as part of your taxable income, as well as subject to an early withdrawal penalty depending on your age (10% penalty if you aren’t 59 1/2 or older).