Writing about personal finances is sometimes trickier than writing about stocks. A company's financials read the same for everyone clicking over to the income statement, and the options for what you can do with the stock (buy, sell, hold, short) are the same for all investors. But something as mundane as rolling over a 401(k) presents wildly different options from one individual to the next, as proven by the reader questions that came to my inbox after I wrote a piece about forgotten 401(k)s.
While the act of "rolling over" -- moving the money from one account to another -- is pretty straightforward, there's more to wresting one's money from a former employer than I let on. (The editors rejected my Dickensian treatise on the topic, so I pared it down for easier online consumption.)
Here are a few of the bits readers wondered about:
Hello. I enjoyed your recent article discussing rolling over a previous employer's 401(k) to an IRA. Should I also consider rolling my previous employer's 401(k) into my existing employers 401(k)? Thanks, Jim
Rolling old 401(k) money into a new 401(k) plan is another option, though not all employers permit transfers from old 401(k)s into the new. There are advantages and disadvantages to doing so, but it all depends on the details of the new plan.
For example, moving money into a 401(k) instead of an IRA preserves your opportunity to take a loan from the plan (for a down payment on a house, for example). That is, if the new plan offers that option. A drawback to going straight from one 401(k) to another would be if the investment choices in the new plan stink (say, if you could pick only company stock) or if the plan fees were outrageous.
If you are champing at the bit to invest in your new plan because your boss offers to match a percentage of your investing dollars, dream on. You won't get matching funds on your transfer. But still, a good plan has those other lovely qualities mentioned above.
Fool tax expert Roy Lewis explains how to make a plan-to-plan move:
"Transferring your money to a new employer's 401(k) plan generally can be done in one of two ways. You can take a distribution of the funds from your prior employer and deposit it (roll it over) into the new employer's plan. Second, if the new plan permits it, you can make the transfer through a trustee-to-trustee transfer.
"The trustee-to-trustee transfer option is always preferable because the IRS requires that if you take a distribution, even one that you will roll over to another 401(k) plan, the employer must withhold 20% of the amount distributed for tax purposes. You won't be able to get this money back until you file your tax return for the year in which the distribution took place and claim that amount as taxes withheld. Additionally, if you aren't yet 59 1/2 and don't deposit the distribution check and/or the amount withheld -- which must be obtained from sources outside the distribution -- within 60 days of the distribution, those amounts will be subject to income taxes and the 10% early distribution penalty."
Your article is not the only one that I have seen about rolling over to an IRA. But no one has stated how much money can be rolled over. Also, since a Roth account has to be tax paid before, I assume that isn't a choice or a good choice. Any information appreciated.
You are correct about the Roth IRA. The IRS allows only 401(k) transfers to traditional IRAs, which are treated similarly tax-wise (meaning your contributions are made with pre-tax dollars and you pay the piper when you withdraw the funds). So the Roth IRA (which requires you to pay taxes now on your contributions so you can avoid The Man at retirement) is off the table.
You can, however, roll your money into a traditional IRA and then convert it to a Roth IRA. That entails paying taxes on everything in your 401(k) (unless you have some after-tax contributions). Depending on the size of your 401(k), converting may or may not be practical. If you can afford to pay the taxes without withdrawing cash from the IRA, then it might be worth it. The prospect of a tax-free retirement is very appealing. If you have to take the money out of the IRA account to pay the taxes, it may be best to leave it in a traditional IRA.
And the amount you roll over into an IRA is not limited since whatever money you stashed in your old 401(k) was already accounted for in the years in which you put it away. In other words, the rollover amount does not count as IRA investments for the year in which you do the rollover.
Just because personal finances can be complicated doesn't mean we won't attempt to boil it down to bite-sized chunks. Got a few minutes to spare? Here are the Cliffs Notes on some important money topics:
- 60-Second Guide to Opening an IRA
- 60-Second Retirement Plan
- 60-Second Guide to Making Your 401(k) Work Harder
- 60 Seconds to Your First Trade
Dayana Yochim can't answer all your 401(k) questions, but the folks on the Foolish 401(k)s discussion board sure try. Check in to chat about rebalancing your portfolio, cashing out, and even if there's such a thing as investing too much in a plan. If you're not already a member, take a 30-day free trial on us.