Changing jobs can be a tumultuous experience. Even under the best of circumstances, making a career move requires a series of tough decisions, not the least of which is what to do with the funds in your old employer-sponsored retirement plan.
Some people choose to roll over these funds into an Individual Retirement Account, and for good reason. About 34% of all retirement assets in the U.S. are held in IRAs, and 59% of traditional IRA owners funded all or part of their IRAs with a rollover from an employer-sponsored retirement plan.1,2
Generally, you have four choices when it comes to handling the money in a former employer’s retirement account.
First, you can cash out of the account. However, if you choose to cash out, you may be required to pay ordinary income tax on the balance plus a 10% early withdrawal penalty if you are under age 59½.
Second, you may be able to leave the funds in your old plan. But some plans have rules and restrictions regarding the money in the account.
Third, you can roll over the assets to your new employer's plan, if one is available and rollovers are permitted.
Or fourth, you can roll the money into an IRA. Rollovers may preserve the tax-favored status of your retirement money. As long as your money is moved through a direct “trustee-to trustee” transfer, you can avoid a taxable event.3 In a traditional IRA, your retirement savings will have the opportunity to grow tax-deferred until you begin taking distributions in retirement.
Rollovers can make it easier to stay organized, maintain control, provide a wider array of investment choices, management, and strategies. Some people change jobs several times during the course of their careers, leaving a trail of employer-sponsored retirement plans in their wake. By rolling these various accounts into a single IRA, you might make the process of managing the funds, rebalancing the portfolio, and customizing the asset allocation easier.
Keep in mind that the Internal Revenue Service has published guidelines on IRA rollovers. For example, you’re generally told you cannot make more than one rollover per year. But what is a rollover and are all rollovers the same? Well, not all rollovers are the same and the one-per year limit only pertains to the 60-day rollover.
The one-per year limit does not apply to: 4
- rollovers from traditional IRAs to Roth IRAs (conversions)
- trustee-to-trustee transfers to another IRA
- IRA-to-plan rollovers
- plan-to-IRA rollovers
- plan-to-plan rollovers
Direct rollover (limit does not apply) – If you’re getting a distribution from a retirement plan, you can ask your plan administrator to make the payment directly to another retirement plan or to an IRA. Contact your plan administrator for instructions. The administrator may issue your distribution in the form of a check made payable to your new account. No taxes will be withheld from your transfer amount.
Trustee-to-trustee transfer (limit does not apply) – If you’re getting a distribution from an IRA, you can ask the financial institution holding your IRA to make the payment directly from your IRA to another IRA or to a retirement plan. No taxes will be withheld from your transfer amount.
60-day rollover (limit applies) – If a distribution from an IRA or a retirement plan is paid directly to you, you can deposit all or a portion of it in an IRA or a retirement plan within 60 days. Taxes will be withheld from a distribution from a retirement plan …so you’ll have to use other funds to roll over the full amount of the distribution.
Also, the Financial Industry Regulatory Authority (FINRA) has published some material that may help you better understand your rollover choices. FINRA reminds investors that before deciding whether to retain assets in a 401(k) or roll over to an IRA, an investor should consider various factors including, but not limited to, investment options, fees and expenses, services, withdrawal penalties, protection from creditors and legal judgments, required minimum distributions and possession of employer stock.5
An IRA rollover may make sense whether you’re leaving one job for another or retiring altogether. But how your assets should be allocated within the IRA will depend on your time horizon, risk tolerance, and financial goals.
1. Investment Company Institute, 2021
2. Distributions from traditional IRAs and most other employer-sponsored retirement plans are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 73, you must begin taking the required minimum distributions. If the account owner switches jobs or gets laid off, any outstanding 401(k) loan balance becomes due by the time the person files his or her federal tax return. Prior to the 2017 Tax Cuts and Jobs Act, employees typically had to repay loans within 60 days of departure or face potential tax consequences.
3. The information in this material is not intended as tax advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult a tax professional for specific information regarding your individual situation.
4. IRS.gov, 2022, https://www.irs.gov/retirement-plans/plan-participant-employee/rollovers-of-retirement-plan-and-ira-distributions
5. FINRA.org, 2021
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