Estimated reading time: 2 minutes 50 seconds
On average, Americans change their jobs 12 times over the course of their working life. That raises the odds that you may have money sitting in a 401(k) plan from a former employer or you need to decide what to do with the balance in your 401(k) with a soon-to-be-previous employer. Instead of having dormant retirement funds, it's advisable to diversify your money. Give your account a workout by moving the funds to a self-directed IRA. Here are your options:
The IRS gives you four options for what to do with the money in a previous employer’s 401(k) plan:
1. Keep the money in the original 401(k). This limits you to the investment available under the plan, and you keep paying the same fees, as a participant in the plan. There are no tax consequences to this option.
2. Direct Rollover the account balance to your new employer’s 401(k). Here again, you are limited by the investment choices offered by the new employer’s plan. You also will pay fees in the new plan so be aware of what those will be. There are no tax consequences to this option.
3. Roll over to an IRA. This opens up your choice of investment options, particularly if you open a self-directed IRA. There are no tax consequences to this option.
4. Take the money as a distribution. Unless you are 59 ½ or older, you will pay both taxes and a penalty for taking your account balance out. For penalty purposes there is a special rule for individuals who separate from service on or after they attain age 55.
How to Roll Over to an IRA the Right Way
Fifty-one year old Robert left his job as a sales rep to become a sales manager with a competitor. He had $250,000 in a 401(k) plan with his previous employer. His first instinct was to roll over the balance into his new employer’s 401(k). But when he reviewed the investment options and fee schedule, he had second thoughts. The investment options seemed to tilt in favor of younger participants with more risk tolerance than Robert was comfortable with. In addition, the fees seemed higher than necessary.
Robert decided to participate in his new employer’s 401(k) plan—after all, the employer matched his contributions and Robert knew the value of tax-deferred savings plans—but he chose to roll over the balance from his previous employer’s plan into a self-directed IRA.
Once the cash value of his old 401(k) was in his new self-directed IRA, Robert was eager to start making his own investment decisions. Traveling around the state he had learned a lot about various local real estate markets. He decided to invest in a rental property near a resort that was popular for skiing in winter and hiking in the summer. Owning the property in his IRA meant all of the rental income, as well as any increase in the value of the property, would be tax-deferred. The purchase also helped him diversify his retirement savings portfolio—something most financial advisors recommend.
Give Your Retirement Savings Plans a Workout
You don’t need to be changing jobs to rethink your retirement savings plans. If you have an old 401(k) from a previous employer or an existing IRA that doesn’t offer the kind of diversification you want, give your account a workout by moving the funds to a self-directed IRA with Entrust. Opening a new account is easy, using our online application, and our trained professionals are only a phone call away.