How To Find An Old 401 And What To Do With It
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There are billions of dollars sitting unclaimed in ghosted workplace retirement plans. And some of it might be yours if youve ever left a job and forgotten to take your vested retirement savings with you.
But no matter how long the cobwebs have been forming on your old 401, that money is still yours. All you have to do is find it.
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How Do I Roll Over My 401 To An Ira
When you leave your job for any reason, you have the option to roll over a 401 to an IRA. This involves opening an account with a broker or other financial institution and completing the paperwork with your 401 administrator to move your funds over.
Usually, any investments in your 401 will be sold. The money will then be deposited into your new account or you will receive a check that you must deposit into your IRA within 60 days to avoid early withdrawal penalties.
Why You Shouldnt Cash Out And Spend
Spending your retirement savings on anything other than retirement is a bad idea. Once that money is gone, it is no longer available to accrue earnings on your nest egg.
The lost opportunity for growth through compounding can never be recaptured, and it can be particularly damaging for older workers with little time to replenish their nest egg. It is also damaging for younger workers who are decades from retiring. By spending $5,000 today, a worker with 40 years to go before retirement could be passing up $80,000 in retirement money.
Regardless of whether you have worked for five years or for 15 years, spending the money from your retirement plan rather than rolling it over leaves you with nothing in the way of retirement savings to show for all those years that you worked. When you start your new job, youll be starting from scratch in the nest egg department. To help make up for the money that you spent, it is likely that any raise that you received for changing jobs will need to be invested in your new retirement plan if you want to have any hope of replacing your lost retirement savings.
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Rollover To A New Employers Plan
Check if your new employers retirement plan allows you to move the balance from your old plan into the new plan. However, you should consider the following:
- Does the new plan have better investment options?
- How do the new plans fees compare to the old plans?
- Is it better for you to consolidate your retirement savings into one plan so you have fewer accounts to track?
What Are The Steps I Need To Follow To Roll Over A 401 To My New Employer
There is a specific way to transfer a 401 to new job that is tax-free. The simplest is for investors to have their 401 account transferred directly to another 401 or IRA without any taxes being withheld.
The other option is for an investor to have their old plan administrator send them a check for the funds, which they are responsible for depositing into the new retirement savings account. Under this option there is a window of 60 days to complete the rollover.
Hereâs the fine print to be aware of and why this route is not ideal: If a distribution check is made out to you personally, rather than to the next fund, 20% must be withheld for taxes. If the individual investor wants to defer tax from the distribution theyâll need to fund the difference based on what was withheld with other sources of income. When tax time hits, if the full amount is rolled over, itâs possible to get a refund of the taxes withheld. Not adding the extra amount withheld may result in a 10% early withdrawal penalty as well.
Investors who donât want 20% withheld should ask the old plan to issue the check to the next fund. Even if the old plan mails the check to the investor, as long as itâs made out to the next fund, no withholding is needed.
To avoid taxes being withheld, choose the direct transfer option between your old 401 and your new 401. Hereâs how to rollover 401 to new employer.
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Is A Rollover Or Transfer Right For You
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*Consider all available options, which include remaining with your current retirement plan, rolling over into a new employers plan or IRA, or cashing out the account value. When deciding between an employer-sponsored plan and IRA, there may be important differences to consider, such as range of investment options, fees and expenses, availability of services, and distribution rules . Depending on your plans investment options, in some cases, the investment management fees associated with your plans investment options may be lower than similar investment options offered outside the plan.
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Rollovers And Withholding Tax
When you change jobs, you usually are eligible to roll over your qualified plan balance to a traditional IRA or another employer-sponsored plan, assuming the amount is rollover eligible. If this is done as a direct rollover, no taxes will be withheld from the amount.
If you have the amount paid to you instead, 20% will be withheld for federal taxes, and you will have 60 days to roll over the amount. Further, if you intend to roll over the entire amount, you will need to make up the 20% withheld for taxes out of pocket.
To help simplify the process, speak to the human resources manager at your old employer to get any documents necessary to initiate the rollover, says founder and president of Index Fund Advisors, Inc., Irvine, Calif., and author of “Index Funds: The 12-Step Recovery Program for Active Investors.”
Have a plan in terms of where you want the assets to go,” Hebner adds. “If it is to your new employers 401 plan, speak with your current HR manager to make sure everything is lined up in order to receive the transfer. If it is to a rollover IRA, have the account already created to receive the assets. This will create a smooth transition for the rollover.
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Roll Over Your 401 To Your Ira
When you started your previous job, your employer may have given you the option to select a pre-tax or after-tax 401. This means that you could contribute to your account with either pre-tax contributions or after-tax contributions. If you contributed to your 401 with pre-tax dollars, you would later have to pay income taxes on your withdrawals after age 59 and a half. If you withdrawal your money prior to reaching 59 and a half, you would have to also pay a 10% penalty. For an example, if you had a pre-tax account worth $100,000 and you were at a 25% tax bracket in retirement, you would really only have $75,000. If you had an after-tax account commonly known as a Roth 401, you would have $100,000 in the account.
Depending on the retirement account you currently have, you may also consider rolling your previous 401 into an IRA or Roth IRA account. IRA accounts often have more flexible investment options and lower fees. You may have more control over your retirement savings by managing an IRA or Roth IRA. You can also select the financial planner that you want to work with. When you have a 401, your employer selects the financial advisor and investment options for your plan, limiting your flexibility.
For IRS rollover eligibility, check out this chart.
Consolidating Multiple Accounts With A Rollover Ira
A rollover IRA is when you take a retirement account you already havelike a 401and roll it over into a new IRA. A rollover IRA offers a great way to consolidate multiple accounts into one IRA. Note that many types of retirement accounts, not just workplace plans, can be rolled over into an IRA.
IRAs may provide a greater variety of investment options than your workplace plan since many employer plans limit the funds in which you can invest. A rollover IRA can also provide you a view of all your retirement assets in one place.
When you consolidate1 your retirement accounts into one, it’s easier to avoid overlaps and gaps in your investment mix. You may also have access to personalized money management and investment guidance.
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How Can I Roll Over The Balance To A New Plan Or An Ira
There are two ways to move your old plans balance to a new plan or to an IRA. You can:
- ask the old plans trustee to directly transfer the balance to your new plan or an IRA, or
- request a lump-sum distribution of the balance from the old plan and then deposit it into the new plan or IRA within 60 days.
The old plan usually withholds 20% for federal income taxes from the distributed amount, so unless you make up the withheld amount when you deposit the distribution into the new plan or IRA, you:
- must include the withheld amount in your gross income in the year the distribution was made, and
- may owe an additional early distribution tax on the withheld amount.
If your distribution includes property, you can either roll over the property to the new plan or IRA or sell the property and roll over the proceeds. In either case, you must deposit into the new plan or IRA within 60 days of receiving the distribution.
Investing The Money In Your Ira
Once the money is rolled over into your new IRA account, select your investments.
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Index funds: You can put index funds in your IRA, which is a fund that aims to mirror the performance of a market index such as the S& P 500.
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ETFs: These investments often make sense for many people because theyre a basket of assets, such as stocks or bonds, that can be bought and sold during market trading hours. ETFs are a good way to diversify a portfolio.
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Stocks: Individual stocks are also an investment option for IRA accounts.
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Mutual funds: These are investments that combine money from investors to buy stocks, bonds, and other assets. Mutual funds are another way to create diversification in your portfolio.
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Real estate: You can hold real estate in your IRA, but youll need to do so by means of a self-directed IRA.
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Cryptocurrency: Bitcoin, Litecoin and Ethereum are all examples of alternative investments you can choose.
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Target-date funds: 401s often allocate money into target-date funds, which buy shares of other mutual funds with the goal of shifting investments automatically over time as you approach a specific date, such as retirement. If you like that approach, you probably can find a similar target-date fund for your IRA at an online broker.
Those who would rather automate the investing process can use a robo-advisor for this. When you open a new account at a robo-advisor, that robo-advisors algorithms usually will select your investments based on questions you answer.
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Option : Cash Out Your Old 401
Another option is cashing out your 401, which does exactly what you would expect provides cash. But there are many implications to consider. The cash you withdraw is considered income, and you may incur local, state and federal taxes by doing so. You will lose the benefit of giving your accounts investments time to grow, and you may need to work longer to make up the difference. Whats more, if you leave your employer prior to the year you turn 55 and are younger than 59 ½, you will be required to pay a 10% early withdrawal penalty on top of any taxes on the money.
Transferring Your 401 To Your Bank Account
You can also skip the IRA and just transfer your 401 savings to a bank account. For example, you might prefer to move funds directly to a checking or savings account with your bank or credit union. Thats typically an option when you stop working, but be aware that moving money to your checking or savings account may be considered a taxable distribution. As a result, you could owe income taxes, additional penalty taxes, and other complications could arise.
IRA first? If you need to spend all of the money soon, transferring from your 401 to a bank account could make sense. But theres another option: Move the funds to an IRA, and then transfer only what you need to your bank account. The transfer to an IRA is generally not a taxable event, and banks often offer IRAs, although the investment options may be limited. If you only need to spend a portion of your savings, you can leave the rest of your retirement money in the IRA, and you only pay taxes on the amount you distribute .
Again, moving funds directly to a checking or savings account typically means you pay 20% mandatory tax withholding. That might be more than you need or want. Most IRAs, even if theyre not at your bank, allow you to establish an electronic link and transfer funds to your bank easily.
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How To Transfer From Your 401 To An Ira
When youre ready to make the transfer, you need to do three things:
I often help clients prepare these requests and do a three-way call with them , making it quick and easy to get things done. But if you prefer, you can probably figure this out on your own.
Unfortunately, you typically have to go through your former employer or a vendor they use. With many 401 plans, you cannot request a transfer using paperwork from the receiving IRA custodian.
Who to Contact
If you work for a large company, you can most likely contact your 401 provider directly. For example, contact Fidelity, Vanguard, or whatever website you use to manage your account. Alternatively, call whoever prints your 401 statements. If you work for a small company, you may need to contact the human resources department, which might just be the person who hired you. Either way, you eventually need one of the following:
What to Say
What Happens To Your 401k When You Quit Or Fired
Shawn Plummer
CEO, The Annuity Expert
If you are considering quitting your job or have been recently fired, its important to know what will happen to your 401k. What happens to your 401k when you quit? What should you do with it? Can I cash out my 401k if I quit? What if I dont have a 401k account at all? Well answer these questions and more in this guide!
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Roll Your 401 Money Into A New Employers Plan
Depending on the benefits package available with your new employer, you may have the ability to simply transfer your money to a new 401 plan. To do this, you would contact the administrator for your old plan and complete the required paperwork to disburse the funds to the new employers plan.
There are other benefits to this option as well, including not losing track of the account by leaving it with a previous employer, says Assaf.
Having only one 401 can make it easier to manage your retirement savings in one consolidated account, says Assaf. In addition, many plans offer lower-cost or plan-specific investment options.
Before taking this step, however, carefully read and understand the new plan rules. And consider the range of investment options available through the new plan to ensure they meet your financial goals and needs.
There may also be differences in the fees associated with one employers plan versus another. The user experience between plans may also varyall of which is worth considering.
The customer service experience and website experience may be different. Youll want to consider how usable the plans website experience is and how easy it is to navigate, as that can vary a lot between an old plan and a new employers plan, says Tierney.
Youll Have More Investment Options To Choose From In An Ira
The more investment options you have, the more likely you are to make better decisions. Thats why Dave likes to say if you have two bad options in front of you, go look for better ones!
Like we mentioned before, rolling your old 401 funds into an IRA means you have thousands of mutual funds to choose from instead of the handful of options you had in your old workplace plan.
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