- A 401(k) rollover might sound complicated, but it just means moving retirement savings from one tax-advantaged retirement account to another.
- People often do this after leaving a job, to consolidate their retirement savings for easier record-keeping and sometimes for more advantageous investments.
- Many 401(k) plans are notorious for high fees and limited investment choices, and rollover options typically include a 401(k) with a new employer or a rollover IRA of your choice.
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A 401(k) is a tax-advantaged, employer-sponsored retirement account that has special rules.
Unlike a regular checking or savings account, where you can add and withdraw funds at any time with few limits and no major tax implications, you can’t just withdraw from a 401(k) at any time.
Withdrawals from a retirement account must be done in accordance with the account’s rules and age requirements. Typically you have to be at least 59 1/2 years old to make a withdrawal. If you take out your funds early, you’ll have to pay both taxes and a penalty.
A rollover is simply arranging to move the money from your 401(k) to another retirement account, not to a checking or savings account. Because you’re putting the money in another retirement account, the rollover allows you to avoid the taxes and penalty that would come with a withdrawal, as long as you deposit the funds in a new tax-advantaged account quickly enough – in 60 days, according to existing rules.
A rollover is considered a transfer, not a contribution, meaning that, for instance, rolling over $US8,000 from your 401(k) into an individual retirement account wouldn’t exceed the $US6,000 annual contribution limit ($US7,000 for people 50 and over) for the IRA.
Why move money out of an old 401(k)?
Opening a new account and moving the funds takes a little bit of work, but the hassle can be well worth it.
The reasons include avoiding expensive 401(k) management fees and getting access to a wider range of investment options. Also, if you change jobs, it might be more convenient to move your money so you can stop keeping track of old accounts.
The typical 401(k) fee today is about 0.50% to 3% depending on the size of your employer’s plan. Bigger companies with larger plan assets typically get lower rates. Those at small businesses and midsize employers pay more. Compare that with most IRA accounts at major US brokerages, which for the most part charge zero monthly or annual fees.
Employer 401(k) plans also offer a limited number of investments. But even if you are lucky enough to get low-cost funds, you probably won’t have access to the entire fund family or any competing funds.
With an IRA at your favourite brokerage, you can choose from any mutual fund, exchange-traded fund, stock, or other tradeable asset offered by your account provider. In most cases, that is the entire list of US mutual funds and ETFs, as well as a range of international investments.
Where should retirement funds go after a rollover?
Choosing a brokerage if you don’t already have one is easy. Several top brokerage houses offer rollover IRA accounts perfect for just about anyone.
Here are some major considerations when choosing an account provider:
- Account fees. The first thing to consider when choosing a rollover IRA is the fees. If an account charges any recurring fees, you should consider skipping it. Many large and reputable companies offer this type of account free of any type of maintenance, minimum balance, or account fees.
- Investments available. Unlike your 401(k), your rollover should give you exactly the investments you want.
- Trading fees. Some brokers give you a list of their own mutual funds and ETFs available to trade with no commissions. This can be very valuable. While you probably shouldn’t be trading actively with your retirement money, those fees do add up over time. If you can avoid them, that’s a big win!
- Convenience. If you already have a brokerage account somewhere and are happy with your account and customer service, you might just want to open your rollover IRA there.
If you don’t feel comfortable managing your retirement investments, one option is to consider a robo-adviser. These investment managers choose your funds for you from a list of low-fee ETFs based on a risk-and-goal survey you fill out when opening a new account.
If you have a chain of former retirement accounts from old jobs, it’s usually a good idea to roll them over into one consolidated account. This helps you save on fees, choose the investments you want, and simplify your life. It’s much easier to manage one account than several.
Related coverage from How to Do Everything: Money
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