If you've left a previous job and decided what to do with the money in your former employer's retirement plan, take a moment to feel proud. There are many complex factors to consider so giving the decision time and consideration is important.
If you're still on the fence about what to do with your old 401(k), 403(b), or any other workplace plan, don't be hard on yourself. We all get busy. But it is important to make a mindful selection when you're ready. You generally have 4 choices:
- Keep the money in your former employer's plan if the plan permits.
- Roll over the money into an individual retirement account (IRA).
- Roll into a new employer's plan if it accepts transfers.
- Cash out.
It's important to know that some plans may have a provision that requires rolling over balances under a certain threshold to an IRA established on your behalf. Balances under $1,000 may be distributed by check. You will get 30 days notice though, so you can make your own plans for your money.
If you've concluded that rolling the money into an IRA is for you, you'll need to get the ball rolling. Start by contacting your former plan to let them know you'd like to roll your funds to an IRA. Ask them what the process and requirements are so you can prepare.
"You're in the driver's seat," says Sham Ganglani, Fidelity Investments' director of retirement product management. "It's important to make a decision about where you would like your money to go." That could be especially true if you've been advised that it will be rolled over to an IRA chosen for you by your former employer's plan or cashed out due to minimum, or de minimis, limits as they're called.
Below are 4 common—and avoidable—pitfalls that can occur while transitioning a former employer's retirement plan into an IRA. Because rolling over a retirement account can be such an important decision, it can make sense to talk to a tax or financial professional if you're unsure about your next steps.
Pitfall #1: Not rolling into the right IRA
Once you've decided to roll the money into an IRA, there are a few steps to take and some planning steps to think about. For instance, do you only have pre-tax money with your former employer, a combination of pre- and after-tax money, or only after-tax money?
How to avoid this pitfall:
If you don't already have an IRA at the receiving institution, make sure you open the right IRA based on the type of contributions made to your former plan.
A rollover IRA is a retirement account that allows you to move money from your former employer-sponsored plan to an IRA—tax- and penalty-free1—while keeping your money's tax-deferred status.
Rollover IRAs are generally meant for pre-tax money from a workplace retirement plan. If your former plan was a Roth 401(k), a Roth IRA is an appropriate choice.
Ask your IRA provider for help choosing the right account if you're unsure. They can explain the options available to help you decide.
Less common, if you've made after-tax contributions to your 401(k), not Roth contributions, it can be a good idea to speak with a financial professional or research what to do with after-tax 401(k) contributions.
Once you have your account(s) open and ready to go, contact your former plan to start the rollover.
If you need assistance, don't hesitate to call and ask for help. A representative from your new firm may be able to join a phone call with the previous firm. If you need help rolling over your old 401(k) to a Fidelity IRA, call 800-343-3548. Generally the entire process can be completed online but help is available.
Have ready the account number for the new account, the official name of the institution where the money is to be rolled over, wire instructions, or the address where the money should be sent when you start the rollover.
Pitfall #2: Getting a check in your name
The IRS is very particular about how the money is rolled over. If it's sent out to you, in your name, taxes may be withheld and you may need to make up those taxes in order to roll the money over.
How to avoid this pitfall:
When possible, request that your former plan provider send the money directly to your IRA provider. This is called a direct rollover and tax withholding isn't required.
In a direct rollover, the check is payable to your new IRA provider for your benefit. You'll generally see this written as "FBO," and then your name.
With an indirect rollover, sometimes called a "60-day rollover," your plan will issue a check payable to you, not your new provider. You are responsible for depositing the check by sending the money to your new provider to go into your IRA. This process comes with some complexities. For instance:
- Your old plan may withhold 20% for federal taxes. If you would like to roll over the full amount of your prior account and taxes are withheld by the previous 401(k) provider, you'll need to make up any difference with your own money. The amount your former provider withheld and sent to the IRS on your behalf essentially becomes prepaid income taxes.
- You must send the check to your IRA provider within 60 days. Failing to meet this deadline can lead to additional taxes and possibly penalties because your funds will no longer be eligible to roll to an IRA. For the most seamless transfer of your account, it may be best to initiate a direct rollover, says Ganglani. "Have the check made payable to the new plan provider receiving the money with FBO and your name and have it sent directly to them."
Even with a direct rollover, some plans might mail a check payable to the new provider to you. Once you receive it, forward it to your IRA provider. Generally, this can be done via regular mail, overnight delivery, or deposit via the IRA provider's app or at a local branch, if available.
Pitfall #3: The rollover stalls for some reason and you don't realize it
"The transfer can stall for any number of reasons," says Ganglani, so it's vital to "proactively follow up."
You don't want to lose track of where your money is—still in the old plan in this case.
How to avoid this pitfall: Be sure to follow up. When you initiate the rollover, confirm the requirements with your former employer's plan provider and ask for the average amount of time to process a rollover request. If the rollover hasn't arrived in your IRA near the expected time, call the employer's plan provider and ask about the status.
You can leverage your IRA provider to make this call. Calling your former plan with a representative from your IRA provider can make the conversation easier. If there's something holding up your rollover, you and the IRA representative can get to the bottom of how to get past the issue and complete your rollover.
Pitfall #4: Not investing your rollover money
"Your rollover is not done until you invest your money," says Ganglani.
Unlike a 401(k), investments aren't automatically made when money moves into an IRA. You'll need to choose investments and buy them or get help from financial professionals. “If you're not proactive, your retirement savings can inadvertently stay in cash," says Scott Boyd, a regional investment consultant at Fidelity Investments.
"If you're 30 or 40 years old, it can sit there as cash for the next 20 to 30 years or so, until you're ready to retire," he says. "That's a big, missed opportunity for growth potential over that period."
How to avoid this pitfall: Think about how your rollover fits into your broader retirement plan. Your retirement savings are foundational to your future. Inflation can eat up the value of your money over time so it's a good idea to choose investments that will at least keep up with the rate of inflation.
But if you're saving for retirement, investing for growth potential may be necessary to help you reach your goals. If you're ready to retire, you may need strategies to provide income, minimize taxes, and help your money potentially grow.
"It's important to make sure that the money is still aligned to your retirement goals," says Fidelity Vice President of Retirements Products Rita Assaf. "You want to make sure you invest it in a way that's appropriate for you."
If you're not sure how to invest, you don't have to do it alone. At Fidelity, there are several ways to get help investing for retirement.
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