401(k) Rollovers


If you are wondering "How do I roll over my 401(k)", here are a few steps to get you started:

1. Decide where you want the money to go

Choose a financial institution like a brokerage firm or bank that you would like to roll over your money to. Helium Advisors has done the research and works with leading providers to handle your 401(k) rollover money. If you already have an IRA at an existing firm, you may be able to consolidate your money in one account. We can help guide you in this area.

2. Decide what kind of account you want

Start by deciding whether you can manage your investments by yourself and make your own investment choices, or if you will need the help of a financial advisor. Most often, the money will be rolled into an IRA. At that point, you will need to decide if you want the money invested in stocks, mutual funds, exchange-traded funds (ETFs) or other investments.

If the funds are going to be deposited in an IRA bank account, you’ll want to compare IRA savings accounts and IRA CDs to find the best fit for you. If you’re under 59 1/2 years old, traditional IRAs are meant for withdrawing money after you reach this age. Generally, you’ll incur a 10 percent penalty when making an early withdrawal. Depending on how far away from retirement you are, you should review and consider your risk tolerance as a key factor in your planning decisions.

3. Contact the right institution to open your account

If the 401(k) company is sending a check, your IRA institution may request that the check be written in a certain way and they might require that the check contains your IRA account number on it.

Follow your IRA institution’s instructions carefully to avoid complications. Your 401(k) institution may be able to wire the funds to the IRA institution. So check there to see what your options are for rolling your 401(k) into an IRA. And whether there are any fees for using this option.

4. See what the procedure is to begin the rollover process

After setting up the IRA, you are probably going to be asked to contact your 401(k) administrator.

You will want to select a direct rollover.

Takeaway: In a direct IRA rollover, the funds are sent straight from your 401(k) into an IRA without you touching the funds. It is important that you specify a direct rollover so that you don’t have the check made payable to you — triggering a mandatory 20 percent withholding for taxes.

5. Remember the 60-day rule

You have 60 days from the date you receive your retirement plan distribution to get it deposited into a qualified account; otherwise, it will be a taxable event.

Your 401(k) institution may send a paper check to you, to the institution where you are opening your IRA, or the money may be rolled over digitally via wire transfer.

If taxes are withheld from the distribution, you’ll need to use other funds in order to roll over the full amount.


What to do about an existing 401(k) at your previous employer

You may want to consult with a tax professional to make sure that you are making a decision that is best for your unique circumstances.

Here are some options to consider:

Keep your 401(k) with your previous employer

In this instance, you won’t change a thing. Just make sure that you actively monitor your investments in the plan for performance and remain aware of any significant changes that occur.

If you really like your current investment options and are paying a low amount of fees, this might be the right choice for you.

Roll it over to a traditional IRA

This makes sense if you want to roll over your 401(k) and you don’t want a taxable event at this time. If you have an existing traditional IRA, you may be able to consolidate all of your IRAs in one place.

Depending on the traditional IRA, you may not be able to add to your existing one. So check with your IRA institution first.

If you are in a lower tax bracket now than you think you will be in the future, this strategy may make sense. Some 401(k) plans, however, won’t allow you to directly roll it over to a Roth IRA. If that is the case, you’ll have to roll over the 401(k) into a traditional IRA and then convert it from there to a Roth IRA.

Money moved into a Roth IRA from a traditional 401(k) has never been taxed before, so it must be included in your gross income for tax purposes.

Roll it over to your new employer’s 401(k)

If your new employer’s 401(k) plan accepts rollovers, this may be a good option if the plan’s expense ratio is lower than your previous employer’s 401(k).

It also might make sense to do this if you like your new employer’s investment options better.

While 401(k) loans are only for extreme emergencies, you may be able to take one out against your previous 401(k) balance – depending on the rules of your employer’s 401(k) – if you move your money over to your new employer’s plan.


Benefits of rolling over your 401(k)

You can consolidate your 401(k) accounts

Especially if you change jobs often, you might find yourself with many 401(k) accounts scattered around. The more accounts you have, the harder it may be to actively make decisions.

You could possibly have more investment choices

With your 401(k), you are restricted to the investment and account options that are offered. An IRA can give you a more diverse option of items to invest in.

This may include investing in individual stocks, bonds or other vehicles that may not be available in your 401(k).

You can’t add to the 401(k) at your previous employer. But, for instance, if you roll it over into a traditional IRA, you can add to that traditional IRA. You will have to follow the annual IRA contribution guidelines.

You’ll have the choice to bring the account anywhere you’d like

Perhaps you already have a financial adviser or financial planner that you work with. Or you have a brokerage where some of your money is being managed. These may be good reasons to roll over your 401(k).


Reasons you may choose not to roll over your 401(k)

You like your current 401(k)

If you are in a low-fee environment, you might want to take advantage of this and remain with your current 401(k) plan. Compare this fee structure to the costs of having your money in an IRA.

If it isn’t broke, don’t fix it. If you like the investment options you currently have, it might make sense to stay in your previous employer’s 401(k) plan.

A 401(k) may offer benefits that an IRA doesn’t have

If you keep your retirement account in a 401(k), you may be able to access this money at age 55 without incurring a 10 percent additional early withdrawal tax.

One way to avoid a 10 percent early withdrawal penalty with a 401(k) is if distributions are made to you after you leave your employer, and the separation occurred in or after the year you turned age 55.

This would not be the case in an IRA, where you would generally incur a 10 percent penalty when withdrawing before 59 1/2.

You may be able to postpone required minimum distributions (RMDs) for funds in a 401(k)

You currently don’t have to take an RMD until either April 1 of the year following the later of the year you turn age 70 1/2 or the year you retire.

So, if you’re still working at that age, you may be able to postpone some of your RMDs if the money is kept in a 401(k).

You can’t take a loan from an IRA

If you roll over the funds into an IRA, you will for sure not have the option of a 401(k) loan. While loans from your retirement funds are not advised, it may be good to have this option in an extreme emergency or short-term crunch.


Other items to consider

Net unrealized appreciation (NUA) and company stock in a 401(k)

If you have company stock in a 401(k), it may be beneficial to transfer those shares into a taxable brokerage account to take advantage of NUA. NUA is the difference between what you paid for company stock in a 401(k) and its value now.

For example - If you paid $20,000 for company stock and it’s now worth $100,000, the NUA is $80,000.

The potential benefit of NUA is that you would pay ordinary income tax, right now, on your basis (what you originally paid).

You’ll enjoy capital gain treatment, which even at the highest tax bracket is only 20 percent, on any appreciation.

An NUA may be subject to a 10 percent early withdrawal tax prior to age 59 1/2.

The entire vested balance in your plan needs to be distributed within one tax year, within the same tax year. It also needs to be completed within one year of a “triggering event.” Triggering events include: death, disability, separation from service or reaching age 59 1/2.

Beware 401(k) balance minimums

If your account balance is less than $5,000, your employer may require you to move it. In this case, you should consider rolling it over to your new employer’s plan or to an IRA.

Always keep track of your hard-earned 401(k) money and make sure that it is invested or maintained in an account that makes sense for you.

If your previous 401(k) has a balance of less than $1,000, your employer may have the option to cash out your accounts.


How long do you have to roll over a 401(k)?

If you have more than $5,000 in your former employer’s 401(k), you generally won’t be forced to roll over your 401(k), according to the IRS.

If a distribution is made directly to you from your retirement plan, you have 60 days from “the date you receive” a retirement plan distribution to roll it over into another plan or an IRA, according to the IRS.

But if you have more than $5,000 in a 401(k) at your previous employer – and you’re not rolling it over to your new employer’s plan or to an IRA – there generally isn’t a time limit on making this decision.


Is it better to roll over a 401(k) to IRA?

If you like your former employer’s 401(k) plan – the investment options and the expense ratios on the investments – then it won’t necessarily be better to roll it over into an IRA. But you may find that if you roll your 401(k) into an IRA, you may have more investment options. Compare expense ratios and fees to see which option is best for you. Rolling over your 401(k) to an IRA may result in you earning a brokerage account bonus, depending on the rules and restrictions that the brokerage has in place.

Typical 401(k) plans only have approximately 20 to 30 mutual funds available. An IRA could give you access to thousands of exchange-traded fund (ETFs) and mutual funds. If you are interested in investing according to a set of values like Socially Responsible or have an interest in sectors like tech or real estate, an IRA may give you more or better options to accomplish your objectives.


Do I have to pay taxes when rolling over a 401(k)?

As long as you roll over your 401(k) within 60 days from “the date you receive” a retirement plan distribution, into another plan or an IRA, it should not be a taxable event. A direct rollover is another method that you can use to roll over your 401(k). Taxes generally aren’t withheld from the transfer amount, and this may be processed with a check made payable to your new qualified plan or IRA account, according to the IRS.

For more information on retirement income needs and income sources, please contact us today