Tips on how to move your 401(k) ac­count

The Arizona Republic - - AZ ECONOMY - Russ Wiles Colum­nist Ari­zona Re­pub­lic USA TO­DAY NET­WORK

In­di­vid­ual re­tire­ment ac­counts have been at­tract­ing record amounts of as­sets, even though rel­a­tively few peo­ple ac­tu­ally con­trib­ute money to them.

An oxy­moron? Not re­ally. The growth of IRAs re­sults from their wide­spread use as tax-shel­tered repos­i­to­ries for money that has been build­ing up in 401(k)-style plans.

When leav­ing a job, work­ers and re­tirees must de­cide what to do with their 401(k) as­sets. Mov­ing them to an IRA of­ten is the best choice.

“Mak­ing these types of de­ci­sions some­times comes at an un­ex­pected time due to a lay­off, ca­reer change, per­sonal emer­gency or an un­ex­pected re­tire­ment,” said Alan Norris, a cer­ti­fied fi­nan­cial plaw­ithn­ner at Norris Wealth Man­age­ment in Phoenix.

The de­ci­sion is com­pli­cated by dif­fer-

ing in­vest­ment op­tions, vari­ances in ex­penses, tax traps and more.

“Know­ing your op­tions ahead of time can save you time, money and a lot of stress,” he said.

Only about one in eight house­holds con­trib­utes money to an IRA, yet IRAs held $8.4 tril­lion as of a 2017 tally by the In­vest­ment Com­pany In­sti­tute.

“Rollovers from em­ployer-spon­sored re­tire­ment plans have fu­eled the growth in IRAs,” said the in­sti­tute, the na­tional mu­tual-fund trade or­ga­ni­za­tion.

Here are some of the is­sues in­volved.

Where to put it

Peo­ple with money in a 401(k) ac­count or sim­i­lar plan usu­ally have three or four op­tions when leav­ing their em­ployer. If al­lowed, they might be able to keep the ac­count in­tact with that com­pany.

They also might be able to trans­fer it into a 401(k) plan at the com­pany where they’re head­ing, as­sum­ing the per­son is tak­ing a new job and that busi­ness or en­tity has a re­tire­ment pro­gram.

A third op­tion is to cash out the money; a fourth is to shift the as­sets to a rollover IRA es­tab­lished at a bank, bro­ker­age, mu­tual fund com­pany or other fi­nan­cial in­sti­tu­tion — com­pa­nies also known as IRA cus­to­di­ans or trustees.

Tax im­pli­ca­tions

Cash­ing out usu­ally is the worst choice, as the tax bite could be se­vere. Un­less you kept your as­sets in a Roth 401(k), or­di­nary in­come taxes would ap­ply on the amount with­drawn.

You also could face a 10 per­cent penalty if you’re un­der age 591⁄2, and the dis­tri­bu­tion could be sub­ject to 20 per­cent fed­eral with­hold­ing. Plus, a per­ma­nent with­drawal would re­move a big chunk of your re­tire­ment as­sets.

You can avoid these tax ob­sta­cles if you keep the money at your old em­ployer or trans­fer it to the new one but, as noted, not all en­ti­ties al­low these op­tions. Mov­ing to an IRA is the fall­back choice.

More on rollovers

There are a cou­ple of ways to es­tab­lish a rollover IRA.

You can do so by tak­ing pos­ses­sion of the cash your­self, then rein­vest it with a new fi­nan­cial cus­to­dian. Or you can have the money sent from your old em­ployer to the cus­to­dian. Both are de­signed as tax-free moves.

With the for­mer, you take the dis­tri­bu­tion, then rein­vest the money into a new IRA at the fi­nan­cial firm of your choice within 60 days, mean­ing that this can be­come a short-term loan if needed. Fail­ing to com­plete the process in time can trig­ger or­di­nary taxes and pos­si­bly that 10 per­cent penalty. Re­gard­less, 20 per­cent with­hold­ing ap­plies.

With a trans­fer, the money is sent di­rectly from your old em­ployer to the fi­nan­cial in­sti­tu­tion, with­out your touch­ing it. Tax pit­falls are avoided.

“The method that causes the fewest headaches is a trustee-to-trustee trans­fer,” Norris said.

With a rollover, by con­trast, “Wait­ing for a check to ar­rive by mail on an un­known date, at­tach­ing the cor­rect trans­mit­tal pa­per­work, for­ward­ing it to the cor­rect ad­dress within 60 days and then track­ing the de­liv­ery can cre­ate un­nec­es­sary anx­i­ety,” he said.

Op­tions and fees

One ad­van­tage of mov­ing the money into an IRA is that you would have wider choices.

“In an IRA, you can choose low-cost in­dex funds; you also can choose op­tions like CDs or in­di­vid­ual bonds,” said Dana Anspach, a cer­ti­fied fi­nan­cial plan­ner at Sen­si­ble Money in Scotts­dale.

“In an em­ployer plan, you are lim­ited to the choices they have pre-se­lected for you.”

Also, fund ex­penses and other in­vestor-borne costs could be con­sid­er­ably lower in a rollover IRA com­pared with a 401(k) plan, es­pe­cially smaller and less ef­fi­cient plans.

Some small 401(k) pro­grams might have rea­son­able costs in the range of 0.7 per­cent to 1.5 per­cent or so an­nu­ally, but other plans charge much more, Norris cau­tioned.

In gen­eral, in­dex mu­tual funds and ex­change­traded funds, which are widely avail­able for IRAs, are among the least costly choices. Fidelity In­vest­ments, for ex­am­ple, re­cently un­veiled two new Zero mu­tual funds with no on­go­ing ex­penses at all.

De­sire to sim­plify

An­other fac­tor af­fect­ing whether and where to move an ac­count in­volves your own fi­nan­cial clut­ter and over­sight abil­i­ties.

In a sur­vey, the In­vest­ment Com­pany In­sti­tute found that peo­ple se­lect­ing a rollover did so for sev­eral rea­sons. Pre­serv­ing the tax-de­ferred sta­tus of their as­sets was im­por­tant, but so too were de­sires to con­sol­i­date as­sets and not leave as­sets with a for­mer em­ployer.

“When you have ac­counts in nu­mer­ous places, it be­comes more cum­ber­some to ac­com­plish ba­sic tasks like re­bal­anc­ing your port­fo­lio, up­dat­ing your ad­dress or chang­ing your ben­e­fi­cia­ries,” Anspach said.

It’s even pos­si­ble to lose track of a 401(k) ac­count left with a for­mer em­ployer, es­pe­cially if the dol­lar amount is fairly small, Norris said.

Se­cu­rity risks

If you choose the IRA route, it’s wise to lean to­ward a large, well-es­tab­lished fi­nan­cial com­pany that of­fers com­pet­i­tive fees and wide in­vest­ment choices. Anspach cites Fidelity, Charles Sch­wab, Van­guard and TD Amer­i­trade as ex­am­ples.

“Big firms like these have safe­guards in place to help pro­tect your ac­counts from fraud,” she said. “They also in­vest (heav­ily) in tech­nol­ogy, so you’ll be able to eas­ily man­age your ac­counts on­line.”

Although Anspach usu­ally rec­om­mends IRA rollovers over leav­ing the money with your old em­ployer, one ex­cep­tion in­volves peo­ple with se­ri­ous debt prob­lems or fac­ing law­suits.

Both IRAs and 401(k)s of­fer con­sid­er­able cred­i­tor pro­tec­tion should you file for bank­ruptcy, she said, but IRA pro­tec­tions for non­bankruptcy le­gal is­sues vary by state.

In many states, in­clud­ing Ari­zona, IRAs en­joy strong pro­tec­tion, but that pro­tec­tion might be lim­ited else­where. If you are fac­ing po­ten­tial le­gal threats, “Check your state laws to see how much pro­tec­tion your funds would have if they are rolled to an IRA,” Anspach sug­gests.

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