401k Rollover Answers

401K Basics

These days, the average company offers its employees a 401(k) retirement plan. These plans replaced the traditional pension plans that our grandparents had. The face of retirement savings changed in 1978, when Congress amended the IRS Code by adding section 401(k). This stipulated that employees are not taxed on income that they choose to receive as deferred compensation rather than direct compensation. The law became effective in 1980 and by 1983 almost half of large firms were offering a 401(k) plan. By 1984 there were 17,303 companies, large and small, offering 401(k) plans.

It is possible for the 401(k) account to stay active for many years after an employee departs the company, though the account must begin to be withdrawn beginning the first of April of the calendar year after the account holder reaches age 70½ or April first of the calendar year after retirement, whichever is later. In the last ten years, some companies started charging a fee to ex-employees who maintained their 401(k) account with them. To avoid  those possible fees,(and to have more investment options),  you should consider a 401(k) rollover. When an employee leaves a company, the money can be rolled over into a new 401(k) account hosted by the new employer. You can also consider an IRA (individual retirement account) at an independent financial institution. A third option is to roll it directly into an IRA held at a mutual fund company.

401K Rollover image401(k) rollovers are often preferred because they are not subject to extra taxes or to withdrawal penalties. Since retirement accounts like 401(k)s are funded with pre-tax dollars, they grow tax-deferred. If you were to withdraw the money prior to age 59 ½, you’d pay a stiff penalty—10% — and, of course taxes on the money. So don’t let confusion about how to do a rollover, or worse — apathy about money, keep you from making a smart choice with your 401(k) account.

Do be aware of some of the 401(k) rollover rules. It can take several months to process a rollover request. One of the major holdups is the matching contribution many companies make to their employees’ accounts. In general, it is easier for companies to do the “matching” part as a lump sum every quarter, so figuring out what you should get right now, as you leave the company, can take time.

As you’re shopping for a spot to park that little retirement nest egg, don’t forget to research the fees. You may decide to keep your account with your old employer if the fee structure is low. Larger companies can negotiate for funds with lower costs than individuals can get on their own.  Here’s how the fees can add up and you might never notice. Imagine Joe, a 35-year-old employee, leaves his job at Widget Co. and leaves behind $33,000 in a 401(k). Widget Co. did a great job of negotiating low fund fees with the investment firm. If we assume a modest eight percent annual return before the fees are deducted,  Joe might expect to have $404,105 in that account when he retires at age 70. If Joe rolled that balance into a retail IRA, he’d only have $366,424 at age 70. That’s a difference of $37,681!

Taking a little time to understand your 401(k) rollover options will save you a bundle down the road. We’ll explore more of your retirement options and the pitfalls to avoid in subsequent posts.

More on the history of 401(k) accounts

25 Responses to “401K Basics”

  1. 1
    Daddy Paul Says:

    Good read. I say if you have a 401K roll it over unless.
    1. You are over 55 but less than 59&1/2.
    2. You have less than 1000 in the account and have no place to roll it over to.
    3. You know you do not have the discipline to cash it out, buy penny stocks or leveraged investments.

  2. 2
    401krolloveranswers Says:

    Hey DP, very good points! Thanks for adding them. I agree, especially #2. It can be a hassle to open an IRA and for a $1,000 rollover? True. Thanks for reading.

  3. 3
    Lernspielzeug Says:

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  4. 4
    401krolloveranswers Says:

    Hello Lernspielzeug — Thanks for the comment. Most people find money topics confusing and they tend to think that they cannot spare even a dollar a week to put into savings. If I can help educate and encourage people to invest in their future then my job is done.

  5. 5
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  6. 6
    Russ Hoffman Says:

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  7. 7
    retirement savings Says:

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  8. 8
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  9. 9
    Quick Student Loans Says:

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  10. 10
    roberto baron Says:

    My former employer sold his company and now my new employer don’t have 401k. Please advise me on what to do with my 401k from the former employer/company. I have almost $70k on it.

  11. 11
    401krolloveranswers Says:

    Hi Roberto, First, my standard disclaimer — I’m an English teacher by trade, so you are getting my opinion and nothing more! $70 is a ton of money and you may want to stop by your bank or credit union and get some professional advice. BUT, since you asked, I would put the money into an IRA. So literally roll it over to an IRA. That way you can keep contributing and keep a close eye on the balance.

    There are tons of firms out there, so it is hard for me to give you much guidance on where to put the money. I would look for a firm with low maintenance fees and a good portfolio of funds to choose from. Depending on your age, you might want to do a standard 25% in small cap, 50% in blue chip and 25% in growth and income. I like working with credit unions, so you might check out one in your neighborhood. The most important thing is that you do NOT cash out the 401k! $70k is a great balance and you do not want to start over again.

  12. 12
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  14. 14
    Antonio Says:

    Hi, Im 35 years old and I have around 11k on my 401k, I have just left my job and im looking for a new career but for the same reasons I would like to withdraw or borrow from that money if I dont have a job in a couple of months, any suggestions??
    I understand I would lose 25% in taxes ? and 10 % more as penalty ?
    Can I rollover into an IRA now and in 2-3 months borrow 3 or 4 k?
    thank you!!

  15. 15
    Says:

    Hi Antonio, thanks for the comment. You cannot borrow against an IRA. But you do not have to roll the 401k until you are ready. So, you could keep the money in the 401k and see how the next few months pan out. Land a new job and then roll the old 401k into the new 401k. And yes, you are right about the penalties so if you can keep from having to borrow against the money in the 401k, all the better. Much as I hate to say it, using credit cards, in the short term might be better than borrowing against your retirement. Those are some steep fees.

  16. 16
    jjww Says:

    Is there any strategy available to include one’s non-vested money when initiating a rollover? I’ve been gone from the company for about a year and my non-vested balance remains in my old 401(k).

  17. 17
    Says:

    Hi — That is a good question and unfortunately one to put to your old HR department. My assumption is that the non-vested monies are just that — non-vested and therefore not your money. Perhaps, since you have not done anything with the 401k, the non-vested funds are still showing but when you initiate the rollover they will go away. As I said, check with your old HR department. And thanks for reading the blog!

  18. 18
    webmaster a401 Says:

    Hi…Thus it becomes quite clear that if an employee contributes to several 401k plans during his working life, he may consider doing a rollover more than once. This consolidation, besides saving on record keeping and other such fee for each separate 401k plan leading to considerable operating costs, also makes managing the retirement accounts a lot easier since the employee need not keep track of several different 401k accounts. After a rollover, the employee’s retirement funds are not scattered into a number of different 401k plans that he had with each of his former employees. Instead, he can concentrate his attention on the consolidated retirement account owned by him after the consolidation process.

  19. 19
    Mona Says:

    I’m divorced, I saw 401k paperwork with my name, is my 401k really mine? Or can my controlling ex “steal” it?

  20. 20
    Old enough to retire Says:

    If I rollover some of my 401k into a self-directed 401k where do I record the information on my income tax for?. I only see where to put the distribution not the rollover so I don’t have to pay taxes.

  21. 21
    401 k Plans Says:

    The company I worked for was just purchased by another and I need to do something with my existing 401K. Per a comment above, I may not want to roll it over if i am 55 but less than 59.5 years of age. I happen to be 55 so this has me a bit concerned, can you help elaborate on that comment?

  22. 22
    Says:

    Hey there, thanks for the question. I think it really depends on two things. 1. How much longer are you going to work? And 2. When do you want to begin to draw money from the account? If you plan on working for another 10 years, then roll the account so that you can continue to max out your contributions. If you plan on retiring soon and begin to withdraw, then sure maybe Daddy Paul’s comment is apt for you. But, I am a firm believer in making the most of the time I have to invest — so even if you work two more years, that’s still time enough to sock another $10-$20 thousand in the 401k account.

  23. 23
    dab Says:

    Is it possible to rollover(without a penality)a 401K if you are still employed? Does it matter your age? Over 59 1/2. Company did not match funds.

  24. 24
    Mike Says:

    My 401k has $800,000. I would like to rollover this into FDIC-insured account(s). The max FDIC insurance is for $250,000 per institution. May I rollover the money in four $200,000 pieces into four different bank IRAs, each of which is FDIC insured?

  25. 25
    shelly Says:

    I have rolled over my 401K to a Roth IRA, but I’m confused on how to put it on my taxes. Is it taxable? and what forms would I fill out? Thanks!

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