Quick Summary

  • You can “roll over” money from one retirement plan to another.
  • An IRA rollover often happens when you leave a job. If you don’t want to leave your retirement money in your former employer’s plans, you can roll over to the plans offered by your new employer.
  • As long as you move the money directly between similar plans, such as between two 401(k)s or a 401(k) and a traditional IRA, you won’t owe any taxes.

Introduction

Retirement plans, including Roth IRAs, traditional IRAs and 401(k)s, can help you meet your savings goals. Sometimes you need you to shift money between two plans, either because you are changing jobs or because you want a different kind of tax break or more investment choices. You might also want to simplify by consolidating the number of retirement plans you have.

If you move money from one retirement account to another, it’s called a rollover. Many rollovers are tax-free, but a few trigger tax consequences. Here are some of the most important questions if you are thinking about a rollover:

  • What kinds of rollovers are allowed?
  • How do you do a rollover?
  • How long do you have to complete a rollover?
  • Do rollovers count against your annual contribution limit?
  • How many rollovers are you allowed in one year?

What Kinds of Rollovers Are Allowed?

There are different kinds of retirement plans and different rules for rollovers between them. These three common types are permitted and do not generally trigger taxes:

  1. Traditional IRA to Roth IRA rollover
  2. 401(k) to traditional IRA rollover
  3. 401(k) to Roth IRA rollover.

You can check this chart to find out whether more complicated rollovers, such as those involving SIMPLE and SEP IRAs, are allowed and whether those rollovers trigger taxes. SIMPLE and SEP IRAs are two kinds of retirement plans commonly used by small businesses and the self-employed.

A jar with coins and the word IRA and savings plan on paper indicative of an IRA rollover

How Do You Do a Rollover?

There are three ways to accomplish the IRA rollover you’re planning. Each one has different implications.

  • In a direct rollover, you ask your plan administrator, usually your human resources department at work, to help you transfer money to another plan. The plan could be another 401(k) at your next job or an IRA at a bank or brokerage. The administrator may issue you a check made out to your new plan. Your rollover won’t be taxed in this scenario.
  • In a trustee-to-trustee transfer, the money moves directly between accounts. Your rollover won’t be taxed in this scenario either.
  • In a 60-day rollover, the money from your retirement plan is paid to you. Taxes are automatically withheld. You can deposit all or a portion in an IRA or retirement plan. You must make the deposit within 60 days. If you want to maintain the level of retirement savings in your new account, you’ll have to use other funds to make up for the amount of taxes that were withheld.

Imagine that you receive a $20,000 distribution from your 401(k) plan. Your employer withholds $4,000. If you want to roll over $16,000, you will report $4,000 as taxable income, $4,000 as taxes paid and $16,000 as a nontaxable rollover. Then, in addition, you pay the 10% tax on early distributions.

But suppose you want to rollover the entire $20,000, but your employer has already withheld $4,000? You must make up the $4,000 from other sources, and count $4,000 as taxes already paid out.

How Long Do You Have to Complete a Rollover?

It’s important to remember that if you chose to have the money distributed to you, you have 60 days from when you receive it to when it must be deposited in the new account.

Do Rollovers Count Against Your Annual Contribution Limit?

No. There are traditional IRA contribution limits and Roth IRA contribution limits, but a rollover does not count against these limits. You can’t contribute more than $5,500 to your IRAs this year ($6,500 if you are 50 or older).

How Many Rollovers Are You Allowed in One Year?

You can roll over as many times as you want in most scenarios, including rollovers from 401(k) plans to IRAs. You can also make as many conversions as you want from traditional IRAs to Roth IRAs. But once the money is in an IRA, it cannot be rolled over to a different account for one year.

You also cannot make more than one IRA-to-IRA rollover in the same year. If you do, you must include the amount you rolled over in your gross income for the year. You may be subject to the 10% penalty tax on that amount.

Why Should I Move Money From a 401(k) to an IRA?

You face a key decision when you leave your job, whether you are retiring or moving to a new position. Whether you leave your money in your old employer’s 401(k) plan or roll over to an IRA depends on a few factors.

  • Which option has lower fees for you?
  • How many investment choices do you need?
  • How important is the support you get from your employer, such as free investment advice?
  • When might you need the money and how much flexibility do you want for emergencies?
  • Are there other considerations?

If you want to consolidate your retirement accounts into one account, an IRA is a good choice. If you want someone else to help you manage the money, leaving it in your 401(k) may be the best decision. There are other differences between the two kinds of accounts that should factor into your decision, too, such as the number of investment choices, fees and rules on withdrawing the money.

You Should Always Pay Attention to Fees in Your 401(k)

If you leave your money in your 401(k), you will pay administrative fees on the account, plus fees on the underlying investments. Ask your human resources department for more information on the total fees you are paying.

If you decide to roll over your money, you can probably find a bank or brokerage that offers free IRAs, but you will still pay fees on the underlying investments.

What Kinds of Investment Choices Do You Want in Your IRA Rollover?

You will have more investment choices in an IRA. A big brokerage, such as Charles Schwab, Fidelity or E*Trade, will offer choices of thousands of funds. The typical 401(k) offers many fewer, in most cases a few dozen at most, but those choices might be all that you need.

Even if you’re no longer working with the company, your 401(k) at work may give you access to the help of an investment adviser. With an IRA you are making all the investment choices on your own, though you can expect some help from the customer service department at the brokerage.

Which Is More Convenient for You?

If your employer offers guidance to those in its 401(k) plan, you may also find that benefit valuable. You will no longer have access to it if you roll your money to an IRA.

However, there are other ways an IRA is more convenient than a 401(k). Some people who decide not to roll over their 401(k)s end up with several plans at previous employers. It’s harder to make sure that you are saving enough for retirement and that your investment mix has the right level of risk for your age and life if you have to keep track of several accounts.

It can be simpler to take required minimum distributions once you hit age 70½ if you roll your money into an IRA, as long as you combine all of your accounts into one. Your minimum distribution is based on the total amount of money in all of your IRA accounts. If you also have a 401(k), you will have to calculate the required minimum distribution separately and take the money from that account too.

Access to the Money Is a Factor

If you withdraw money from a 401(k) or an IRA early, before age 59½, you will owe the tax on the amount withdrawn at your usual tax rate. You will probably also owe an additional 10 percent penalty. But there are exceptions.

A 401(k) offers some situations where you can withdraw money without penalty. For instance, if you retire or lose your job between ages 55 and 59½, you are allowed to make withdrawals from your 401(k) with no penalty.

You can find out more about the taxes and penalties on early withdrawals from a 401(k) here. And here is information on taxes and penalties on early withdrawals from an IRA.

It is easier to take money out of an IRA if you need it early than it is to withdraw it from a 401(k), though you will still owe the taxes and penalty. A 401(k) plan will typically have rules about when you can take the money out.

Different Rules in Bankruptcy

A 401(k) has some legal protections an IRA doesn’t have. You will have protection against bankruptcy and lawsuits with a 401(k); in other words, if you declare bankruptcy or someone sues you and wins, that person cannot touch the money in your 401(k). With an IRA only up to $1.245 million of assets are protected in a bankruptcy.

Ultimately, it is a personal decision whether to roll your 401(k) into an IRA. Knowing the pros and cons of each scenario will help you make the right choice for you when considering an IRA rollover.

 

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