Tip for Moving Your 401(k)
The days of working at the same employer for 30+ years then retiring is fading as fast as corporate pensions. If you've switched jobs recently, there are many important decisions you need to make regarding your 401(k). One of the options is to roll your balance into an Individual Retirement Account [IRA] for the following reasons:
1) More (and better) investment options. Instead of just 12 or so choices given to you by the administrator of your company's plan, you can chose between, among other instruments, thousands of mutual funds or individual stocks.
2) Flexibility in estate planning. You can name more than one beneficiary, have contingent beneficiaries, and in most cases, name someone who isn’t your spouse as a beneficiary. In addition, beneficiaries of an IRA aren’t required to take a lump-sum distribution and pay taxes at that time, so the money can continue to grow tax-deferred as a “Stretch” IRA.
3) Immediate access to your money. There are no restrictions on when you can take money out of your IRA; the only drawback is that you will pay federal and state income taxes on the withdrawal, and in most cases a 10 percent early-distribution penalty if you are under age 59½.
4) Penalty-free withdrawals. In certain circumstances, you may be exempt from the 10 percent early-distribution penalty (i.e., if withdrawals are used for higher education expenses for yourself, your spouse, or your children or grandchildren). You can also make penalty-free withdrawals ($10,000 lifetime maximum) from your IRA to put toward a principal residence that is a first-time home purchase for you or your spouse, child, grandchild or ancestor.
5) Manage your accounts in one place. You can move your 401-K to an IRA in the same online brokerage where you have other accounts. With some brokerages, such as E*Trade, you can consolidate all your bank accounts and brokerage accounts in one place. Financial firms tend to provide better service and higher interest rates on deposits if you have more assets with them.
One tip to protect yourself if you choose to roll money from your 401(k) over to an IRA: make sure it’s a direct trustee-to-trustee rollover from your employer’s plan to your designated IRA account. This way, you won’t be required to pay federal and state income taxes on the transfer; taxes will be due only when you withdraw the money. If you're transferring a 401-K to an IRA in an online brokerage, just call the brokerage and ask them how to handle the transfer to ensure there's no tax liability.