Q: How do you roll a 401(k) into an IRA with the same investment company? Should I be able to preview their investment options before I decide? Will I lose any money on the rollover?
A: Typically, the question of what to do with a 401(k) plan comes up when someone is switching jobs. If you are leaving your job, you have a few choices as to what to do with your retirement money.
You may be able to leave the money in the old 401(k) plan and roll it into your new employer’s plan, if thats allowed, or roll over the money into an Individual Retirement Account (IRA). Theres another option; but, unless you are in dire straights, I wouldnt recommend it. You could cash out, but thats an expensive choice. So, lets look at the other choices.
A change in the tax law allows you to take your retirement money to your new job if the employer has a 401(k) plan. You may have to wait awhile before you can make the transfer of funds. During this wait period, you can just leave the money where it is. If your account has more than $5,000, your former employer can’t kick you out of the company-sponsored plan. If you are happy with the returns and choices in your old plan, you could just leave it be. If you have less than $5,000 in the plan, you may not be able to stay in your old plan.
If you arent happy with your old plan, or you just want more options, you take the money and put it in whats called a Rollover IRA, which allows you to invest the money however you want. If you choose this last option, make sure the money is transferred directly from the old plan to the new IRA. If your employer makes the check payable to you, the company is required to withhold 20% of the money for tax purposes. If your employer sends you a check for the remaining 80%, you have to make up the missing 20% to avoid the penalty for taking a nonqualified distribution.
However, dont worry; youll get the money back when you file your next federal tax return. If you dont make up that 20%, it will be included in your gross taxable income. So, remember to avoid any tax issues in a rollover, make sure your company 401(k) plan makes the check payable to the institution setting up the IRA and that check is deposited directly to your IRA.
If you forget this advice and get the retirement money, please, please, be sure to roll it over before the 60-day deadline. If you fail to roll over the money within 60 days, you will be subject to a 10% penalty for withdrawing the money early. I can’t tell you how many people get caught with a nasty tax bite because they neglect to roll over their retirement money to meet the 60-day deadline. [There are some limited exceptions to the 60-day rule. The IRS may grant you a waiver if, for example, you became disabled or are hospitalized.]
Doing the rollover wont result in a loss. A rollover is just the process of moving your retirement savings from the 401(k) into the IRA. Rolling over to an IRA allows you to keep your savings tax-deferred and typically gives you a broader choice of investments. And of course you will be able to determine how your money is investment with a rollover IRA.