This is the worlds leading source of financial content on the web, ranging from market news to retirement strategies, investing education to insights from advisors.
Forex Forever!

The Smartest Ways to Roll Over Your 401(k)

Author: Andrew Harris

When you change jobs, or stop working, you have to decide what to do with the money in your 401(k). You have a number of choices and the one that makes the most money will be different depending on your circumstances.

It probably doesn't make sense to take a lump-sum payout. Unless you're at least 59½ (or meet some other very specific exceptions), you're going to pay a 10% penalty for an early withdrawal. (See What Is the penalty for taking money out of my 401(k) before I'm 59 years old?) Even if you are past that age, you will likely trigger a pretty hefty tax bill. Instead, you're probably looking to roll over the account to something else – but where should it go?

First Consider Net Unrealized Appreciation

If you own company stock as part of your 401(k), you need to know about net unrealized appreciation, or NUA. NUA allows you to roll your company stock into a regular brokerage account and pay long-term capital gains on your earnings instead of ordinary income tax on them.

Kevin Clark, of Quintessential Retirement Services, says, Using NUA, one would have to take their employer stock as shares – [they] cannot be liquidated and sent – and set up in a brokerage account outside of the 401(k). The participant would then be taxed on the cost basis – not the account value – at a long-term capital gain rate, not the ordinary income tax rate used for 401(k)s or IRAs. The current long-term capital gains rate (see What You Need To Know About Capital Gains And Taxes) is maxed out at 20% versus 39.6%, plus all of the Medicare and additional taxes if one's income is over $250,000.

You can't do that with the entire account, but using NUA will probably let you pay considerably less on the gains earned from your company stock.

For more information, see Rolling Over Company Stock: A Decision To Think Twice About.

Tips:

  • Figure out how much of your 401(k) balance is company stock.
  • Ask a financial advisor about NUA and whether it applies to you.
Roll It Over to Your New Employer

Not all employers will allow you to do this but if your new company does, take a good look at the investment options available in its 401(k). If there are better options than where your money is now – and, equally important, if the new company's fees are lower – this may be a good idea if you don't want to manage the funds yourself or and don't have a financial advisor.

To find out if this is an option, read the documents that come with your new 401(k), ask your HR department or call the investment firm handling the account.

Tips:

  • Ask your new employer if you have the option to roll your old 401(k) into its plan.
  • Evaluate whether the investment options in your new employer's plan are better or the same as what you had before. Only roll the account to your new employer if the investment options and fees are the same or better – or your old employer won't let you keep the funds in the old account.
  • Figuring out the fee structure isn't always easy. Ask the broker to break down the fees for you.
Roll It Over to an IRA

This is always a popular choice. Rolling the money to an IRA gives you complete control over your money. Do you want to invest in individual stocks? You can. How about options or MLP​s? You can – to a degree. IRS rules prevent you from using your account as collateral so you can't sell short or have a margin account, but most everything else is allowed. Brokers vary in their rules so ask before you roll over.

Don't forget about NUA and if you're in the market to roll an account over, do a little shopping. Brokers are eager to get your business and may offer an incentive, often in the form of free cash, to get your business. Don't evaluate on freebies alone but if they're willing to give you free cash, that might count for something. For examples of what you might find, see Best 2015 IRA Promotions.

Tips:

  • Ask a financial advisor about the benefits of rolling over to a Roth vs. a traditional IRA. There are many scenarios to consider with this.
  • Don't forget about NUA if you're considering rolling a 401(k) that held company stock.
  • Shop around. Look at transaction costs, find an advisor who offers freebies or incentives that come with rolling your account over to him or her (see Rolling Over a 401(k)? Consider the Fees).
  • Ask your old 401(k) custodian to transfer the funds to your new broker. Do not take custody of the money yourself to avoid any potential tax difficulties.
The Bottom Line

Nobody said you have to roll over the account. Just because you left the job the 401(k) was tied to doesn't mean the money has to leave the brokerage firm that held it. In fact, the firm would probably be more than happy to keep managing your money.

Because 401(k)s come in many shapes and sizes, only a financial advisor can help you evaluate the decision. Especially if your account is large, don't make this decision without some help from an expert. For more information, see 5 Benefits of Rolling Over a 401(k) and Best Ways to Roll Over Your 401(k).

last five articles

#948 The Best Strategies to Maximize Your Roth IRA

Author: Jacob Davis

Unlike a traditional Individual Retirement Account, a Roth IRA is funded with money that has been taxed at the outset – but once funded, the account can grow and (so long as certain rules are followed) is never taxed again. Those tax-free distributions may seem like a huge advantage over a trad... see more

#1478 Are You A Target For Identity Thieves?

Author: Daniel Williams

Identity fraud happens when criminals use someone's stolen identity (identity theft) to commit a crime, such as purchasing items with your credit card. It's not going away anytime soon – 13.1 million people experienced identity fraud in 2013, according to Javelin Strategy and Research's 2014 Id... see more

#1003 Top Stock Market Apps

Author: Jacob Davis

When it comes to managing finances and tracking the markets on the go, there are a number of excellent apps that can be downloaded and installed onto your mobile device from Apple iTunes (AAPL) or the Google Play Store (GOOG). Whether you need to make a trade, check on your portfolio balance, or ... see more

#465 Student Loan Reality Check

Author: Jacob Jackson

With college students back in classes for the fall semester, their parents can only hope that they are making the best use of their time and money. There is a lot at stake -- the amount of student loans outstanding is approaching $1.3 trillion, having mushroomed by over 50 percent in less than th... see more

#232 Hello, myRA: Retirement Savings for Beginners

Author: Ethan Davis

A new acronym has been added to the lexicon of savings and retirement plans - the myRA. That stands for My Retirement Account and is a twist on the well-known IRA or Individual Retirement Account.President Barack Obama announced the new payroll deductible savings vehicle in his State of th... see more