What to Know About 401(k) and IRA Rollovers

Written by Canty Financial - Published on June 7, 2021

Rolling over a 401(k) account when you leave an employer can be a smart move with these important retirement assets. IRA accounts are also an important tool in your retirement savings efforts. From time to time it might make sense to roll an IRA account from one custodian to a new one. 

Let’s look at the details of both types of transactions. 

401(k) Rollovers 

When you leave an employer who offers a 401(k), a 403(b), or similar retirement plan you have several options, including: 

  • Taking a total or partial distribution in cash.
  • Leaving the money in the plan if the balance is at least $5,000.
  • Roll the money over to a new employer’s plan if applicable.
  • Roll the funds to an IRA at an outside custodian. 

Taking a distribution or some of all of the money in your 401(k) will trigger any taxes due and potentially a penalty if you are under age 59 ½. The money is also not invested and doesn’t have the opportunity to continue to grow for your retirement. 

Leaving the money in your former employer’s plan is potentially a good idea if there are exceptional investment options that cannot be replicated elsewhere. One drawback is the potential that an investor might lose track of this money or not manage it in line with the rest of their portfolio.

Rolling the balance over to a new employer’s plan, if you are leaving your old employer to take a new job, can make sense if your new employer has a solid, low-cost plan. It’s important to review the quality of the investment menu. If the plan is a good one, this can offer the opportunity to consolidate your prior 401(k) funds with your account at your new employer, giving you one less account to worry about. 

Additionally, for those working past age 72 when required minimum distributions commence, the money in their current employer's plan will be exempt from RMDs while still employed. Their employer must amend their plan to include this exemption and the participant must not hold a 5% or greater ownership stake in the company. 

Rolling the Money to an IRA 

Rolling the money to an IRA may be the best option for many investors. This is especially true if you have other funds in IRA accounts and taxable accounts outside of the 401(k) plan. An IRA allows you to invest the rollover money in line with your other investments and your overall asset allocation strategy.

An IRA provides far greater choices than the constraints of a 401(k) menu.

In rolling the 401(k) to an IRA it's important to communicate with both the IRA custodian and the administrator of the 401(k) plan. You will want to be sure the funds are rolled over directly from the plan to the IRA custodian on a trustee-to-trustee basis. 

If the funds are distributed to the participant and they then roll the money over to the IRA, the 401(k) plan administrator is required to withhold 20% in taxes. In order to keep the money’s tax-deferred status, the participant must deposit not only the money received but also the amount of the taxes into the IRA within 60 days in order to avoid a taxable distribution and any applicable penalties on the rollover. 

Sometimes the distribution will be made in the form of a check made out to the IRA custodian, FBO (for the benefit of) the 401(k) participant. This is still a direct trustee-to-trustee transfer, but the check does need to be deposited into the IRA in a timely fashion. 

Funds held in a designated Roth 401(k) account should be rolled over to a Roth IRA. Roth 401(k) accounts are not exempt from RMDs, money held in a Roth IRA is. 

IRA Rollovers vs Transfers

There may be occasions where you want to move an IRA account from one custodian to another. 

There are different rules that apply depending upon how you move the money. 

IRA Rollovers 

An IRA rollover is defined as taking the money from IRA A and depositing that money in IRA B at another custodian. For this type of transfer, there is a 60-day time limit to deposit the funds from the old IRA to the new account. If you take longer to do this, the money becomes taxable and penalties will apply if you are under 59 ½. 

The rules only allow one IRA rollover per 12-month period.

IRA direct transfers 

In most cases a better way to move money from one IRA account to another is via a direct transfer. For example if your goal is to consolidate your IRA holdings from several IRAs at various custodians to one IRA account, you could initiate an electronic transfer of the money from the IRA accounts you want to eliminate to an account at the custodian you prefer. In fact we feel that in virtually all cases a direct transfer from one IRA account to another is the most efficient and the best route to go. 

When doing either a rollover or direct transfer it's important to be sure to do the transfer from and to the same type of IRA account. In other words rollover a traditional IRA account to another traditional IRA account and a Roth IRA to another Roth IRA account. If you do a rollover be sure not to commingle any outside assets into the amount being rolled over, this could trigger an undesirable outcome for you. 

IRA/ 401(k) Rollovers: Summary

It's important to stay in control of your retirement savings whether in a 401(k) account, an IRA or some other type of retirement account. 

When leaving an employer, it's critical to make an affirmative decision as to what you will do with your 401(k) money. This is an important component of your retirement savings and should not be ignored as you move on from your employer. 

IRA accounts should also be affirmatively managed. Whether just to consolidate several old IRAs into one account at the custodian of your choosing or perhaps your financial advisor has a custodian of choice, it's important to stay on top of where your IRA accounts are housed and whether this is the best place for them. 

In all cases, whether dealing with an old retirement plan account or moving an IRA, it's crucial to understand and to follow all rules regarding the process. Violating any of the rules governing these types of transactions can be costly to investors by inadvertently triggering taxable transactions.

At CFM, we help our clients make informed decisions when rolling over their retirement plans. 

Please call us with any questions or concerns regarding a 401(k) or IRA Rollover. 

Ballston Spa: 518-885-3230

Naples: 239-435-0090

Bill Canty, CFP®, CPA

Ed Canty, CFP®Investment Advisor

Joe Canty, Investment Advisor

Maureen Walsh, EA, Investment Advisor

Tina Alteri, CPA, Tax Advisor

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