401(k) Rollover -- What To Do With Your 401(k) When You Leave Your Job or Retire

hey everybody welcome back to the financial freedom show my name is rob berger in today's video we're going to talk about what we should do with our 401k or other workplace retirement accounts when we leave a job and this can come up in a couple of i think really i guess three different scenarios of course one is when you simply change jobs you leave one job and you immediately take another job at a different company second scenario could be you leave a job but you don't go you don't get another job right away maybe there's some time in between two jobs and then the third scenario of course is just you know when you retire and so we're going to kind of cover all three of those so this is what we're going to do in today's video first i'm going to walk through the three basic options you have with a 401k or other workplace retirement account when you leave a job that's the first thing we're going to do and then for each of those three we're going to kind of walk through the pros and cons of each and just some things to think about as you make a decision for your own situation and then finally i'm going to walk through some really important advanced strategies to think about when it comes to a 401k rollover now in the video i'm going to show you a number of different resources on the screen and at the end though i'll have links to all of them below the video and one thing i want to mention is when we're dealing with 401ks and sort of rolling them over to an ira for example one of the options we'll talk about i've done this myself many times it is kind of a pain and i'm actually in the middle of doing that right now with my two 401k plans that i had when i was employed at forbes and i'm using actually a company called capitalize i'll show you this on the screen here they are they actually help folks roll over a 401k to an ira and they do it totally for free and so i'm actually in in the middle of using them right now to roll over my two 401ks they can work with a new ira that they can help you set up or they can work in my case i already have an existing ira that i'm going to use they can they can work with an existing ira as well so i think a really great resource and a partner of this channel and i'll leave a link to capitalize uh below the video all right so let's get right to it so again for most of the time you have three options when you leave a job to what you're going to do with your 401k one option is just to leave it leave it alone where it is leave it with your former employer there are some limits depending on how much money you have in the 401k if you just have a few hundred bucks or a few thousand dollars your employer's plan may not allow you to leave it there so keep that in mind but uh if that's not the case you can leave it there and i've had uh 401ks i've wanted a former employer for more than 20 years so that's that's option one we'll talk about it the second option this is going to be very important for a lot of reasons when we when we get to retirement is you can transfer the 401k to your new employer so that's the second option we're going to look at in some detail and then of course i think a very common option is to simply roll over the 401k to an ira so that's what we're going to talk about uh and uh so let's sort of dive in and and talk about the pros and cons of each of those options and i guess just some things to think about and we'll start with just leaving the 401k at your current employer there are a lot of advantages to this approach the first one is it's simple i love options where i don't have to do anything and that's the option here you know you you just leave it there you don't have to make any changes that can be a great option if you like the investment choices you have in in your former employers uh 401k of course you don't have to like all of the investment options that they have but just the ones that you're going to use and if you like the the options that they have uh that's another reason to just leave it alone the other thing to keep in mind is you can you can decide down the road to roll the 401k over to an ira or perhaps a future employer's plan it's not as if you lose those choices if you don't make them right away so even if you choose to leave your 401k your current employer you can always change your mind uh down the road so that's something to keep in mind now you know there are some i think disadvantages or at least things to think about of course one would be if the investment choices in your in your former employers 401k you know aren't that good they're really expensive they don't have the kinds of investments that you want so that would be a good reason uh not to leave your 401k where it is and the second thing to keep in mind is you know there is some management headache you know you could roll it into a 401k and you'd have you know into a current employer's 401k and you just have fewer accounts to manage or maybe you've got an existing rollover ira we'll talk about those in a minute and you could roll it into that again it would just be a little one less account to have to manage the third thing to think about is that you know there are exceptions to the early withdrawal 10 penalty there are exceptions as it relates to 401ks and other workplace retirement accounts and there are exceptions uh to early withdrawals for iras the thing to keep in mind is those exceptions are different they're not the same for 401ks and iras and there are really fewer exceptions to that 10 penalty uh when it comes to a 401k so that might be something to consider let me show you a resource this actually comes from the irs and again i'll have links to all all of this but they give us a nice chart exceptions to the 10 additional tax and you can see the chart covers both 401ks they're called qualified plans as well as various types of iras and two that come to mind of course again you'll check this chart out the link will be below the video but you may have heard that there's an exception for higher education expenses to the 10 penalty rule well true for for iras but not true for 401ks and you may have heard of the first time buyer exception here it is well again that's true for iras not true for 401ks so at least something to keep in mind depending on what you plan to do with the money so that's option one pros and cons some things to think about leave the money at your your former employers 401k the second one would be transfer you know you get a new job whether it's right away or a little bit later you have a new employer with a 401k plan uh you have to check with them to make sure they allow this but i think most certainly in my experience most do you can transfer the 401k from your former employer to your current employer and there's a couple of important um advantages to that the first is of course it's just consolidating accounts i i'm a big believer in having as few accounts as possible and so it's just less to manage so it reduces the number of accounts you have but here's the other thing it may give you some additional options when it comes time to retire and there's two in particular that i have in mind they're exceptions they're called the still working exception and the age 55 exception and you might be saying what in the world are those we'll come back to them they're part of the advanced strategies that we'll talk about in a minute now there may be some disadvantages of course uh to transfer in your 401k uh to your new employer the first is does take some work you know it does take some paperwork and i mentioned capitalize which i'm using to do a rollover from a 401k to an ira but unfortunately they can't help us with a transfer from a former employer's 401k to a new 401k so you've got to do it on your own i you know i've done these sorts of things before uh you know it just takes some time and effort so it's something to consider and the second thing to consider and make sure before you you take this approach is that you like the investment options that your current employer has in its 401k or other workplace retirement plan the last thing you want to do is transfer from say a 401k with great investment options at your former employer to the 401k with your current employer that doesn't have great options so those are things to think about when it comes to time to transfer or to consider transferring from a former uh employer to a current uh employer and then the third option again just to roll over to a 401k or to an ira i think that's probably the option that most people take it's the option that i've taken several times in my career and as i mentioned i'm doing that now with capitalize and definitely some advantages here the first is you have complete control over where to open uh the account you choose where you want to open your ira account with a 401k your employer chooses and because you choose where to open an ira you can also basically have complete control over all of the investments that you want to use and the cost associated with them you can pick low-cost index funds you could open one up vanguard or fidelity or schwab or a betterment i mean the list goes on and on so you have complete control and again it can help you consolidate accounts particularly if you've changed jobs a number of times and you have all these 401k accounts out there consolidating them into one ira can just make management um you know a little bit easier now you know with anything are there some disadvantages well again it does take some effort with capitalize it's easy i've done it on my own in the past it's not again not the end of the world but it does take some effort and it may limit some of your retirement your options when it comes time to retire that are available with 401ks i alluded to them a minute ago the still working exception and the age 55 exception and we're going to get to those in just a second now one really important thing to consider if you're going to roll over a 401k to an ira you want to make sure that it's a designated rollover ira a rollover ira is different than a traditional ira in really two kind of important ways the first is you have more protection from creditors with a rollover ira than you have with a traditional ira you know this may or may not be important to you but but here's the the basic rules is that a qualified plan like a 401 k is completely protected from creditors a traditional ira is protected up to a a large amount it was a million dollars and that number goes up gets adjusted every three years the current number is one million three hundred and sixty two eight 800 that's going to get adjusted i believe april 1 of 2022. that may be more than enough for you uh but it's something to keep in mind the thing is a rollover ira it protects it gives you protection from your creditors just like a 401k does there is no limit to that protection so that's one thing uh to keep in mind um but there's i think an even more important thing to keep in mind and that is with a rollover ira you can later down the road roll that into a future employer's 401k if they allow it uh you can't typically do that with a traditional ira so if you have a designated rollover ira that contains just assets you've rolled over from a 401k you can have the option down the road to transfer roll that into a future employers 401 k and you might say well that okay that that's interesting rob but why in the why in the world would i ever want to do that well now we get to the age 55 exception and the still working rule and so let's start with the age 55 exception this is an exception to the 10 penalty tax you may know that for traditional 401ks and iras typically unless some exception applies if you take the money out before you're 59 and a half in addition to any taxes you'll owe you get hit with that 10 penalty and no one wants to to pay that well there is one of the many exceptions comes right from the irs in fact i can show you the website and again i'll leave a link to this here it is and you can see right here it says the 10 tax will not apply if distributions uh before age 59 are made in any of the following circumstances the one we're interested in is right down here made to a participant after separation from service if the separation occurred during or after the calendar year in which the participant reached age 55 so let me kind of translate you're at your job you've got a 401k and you're you retire in the year you you turn 55 or or older you can withdraw just from that one 401k without incurring the 10 penalty tax that rule 55 exception at age 55 exception doesn't apply to iras it also doesn't apply to any 401ks you have it former employers so one strategy if if you're going to take advantage of the age 55 exception is to take any 401ks with former employers that you may still have get them transferred to your current employer and this is where the rollover ira comes in maybe you rolled over a 401k years ago to a rollover ira and you want in to include that in your current 401k to take advantage of this age 55 exception you can roll that rollover ira into your current employer's 401k so you have all that money into your current 401k and you qualify for the age 55 exception you have to leave work you really do have to retire uh and if you do that uh you you can take advantage of that rule so that's just one example of where you might want to take a rollover ira even years later and transfer it to your current employer's 401 k so that's the age 55 exception the other exception is the still working exception so the idea is this as you probably know normally you have to take rmds uh the rule changed was 70 and a half uh currently it's 72 but you have to take these required minimum distributions it's true for 401k it's true for an ira but there is an exception and it's this if you're still working say when you turn 72 you can hold off on the rmds until you actually retire now you know there are some exceptions i should warn you about there's some exceptions to the exception one of which is you own the business and it's a five percent ownership rule uh so you want to make sure you you do qualify for the still working exception but if you do and you decide to work later in life you can use it to put off the required minimum distributions let me just show you a quick resource this is actually from fidelity and they describe it uh right here you may qualify for an exception to the rmds from your current employer sponsored retirement account it's important and they give examples 401ks and 403bs if you're still working and there's this five percent ownership rule you do not own more than five percent of the business you work for and you have an employer-sponsored retirement account with the business you're working for so that's something to keep in mind again uh the key to remember doesn't apply to iras right so again if you have a rollover ira and you decide to work past 72 you might have the option of transferring it to your current employer's 401k and if you qualify for the still working exception it may allow you to delay the required minimum distributions from that account all right two more advanced strategies before we bring the video to a close the first is you may have a roth 401k and and then these two exceptions apply to that with the roth 401k you of course can roll it over into a roth uh ira and the thing to keep in mind about a roth ira is that uh you have to not only turn 59 and a half unless there's some other exceptions that apply you not only have to turn 59 and a half before you before you take out earnings from a from a from a roth ira roth ira but you have to have had at least one roth ira in existence for five years it's sort of the five year rule and here's the thing if you are 59 and a half or older but you haven't met this five-year rule and you take earnings out of the account you'll actually get taxed on those earnings you won't actually have the 10 penalty but you will get taxed let me show you this is actually from schwab and again i'll again i'll link to all these resources below but you can see it here you're over age 59 and a half withdraws from a roth ira you've had less than five years if you haven't met the five-year holding requirement your earnings will be subject to taxes but not penalties now here's the deal you only have to satisfy the five-year rule once for one roth ira and once you've satisfied it uh you're good to go and so you may think about that if you leave a job and you have a roth 401k at that former employer but you don't have a roth ira maybe you make too much money to qualify you may want to think about rolling that roth 401k into a roth ira so that you can start that five year clock ticking so something to keep in mind now the last uh sort of advanced strategy to think about also deals with roths and here it is you may have you may know that with a a traditional ira just like a traditional 401k there are required minimum distribution rules we've referred to them a moment ago with a roth ira there are no rmd rules you're not forced to take the money out when you when you turn beginning when you turn 72 however with a roth 401k you are roth 401ks are subject to rmds so if you don't want to start taking money out of your roth 401k when you turn 72 well you can do a rollover into a roth ira so a lot of things to think about again i'll leave links to all of the resources uh below the video and uh make sure you get this right if you get some of these things wrong it can really hurt you i've done my best to get it right and to show you all the resources i'm using but keep in mind these rules change often they're very complicated and you know even i make mistakes with them from time to time so before you make any decisions consult with a professional talk to your hr administrators who run the 40401k talk to a retirement account specialist just to make sure you get it right before you make any uh decisions hope you found this helpful if you have any questions or comments just leave them in the comments below the video i'll do my best to help you out any way i can and until next time remember the best thing money can buy is financial freedom

Channel: Rob Berger

Views: 149,389

Keywords: 401k rollover, 401k rollover to ira, rollover ira, rollover 401k, how to rollover a 401k, 401k rollover options, ira rollover, rollover 401k to ira, rollover ira vs traditional ira, 401k rollover to traditional ira, how to roll over 401k, retirement planning, still working exception, age 55 rule

Id: tnz0DGSfCmM

Length: 19min 9sec (1149 seconds)

Published: Fri Dec 17 2021