Get a 401(k) rollover wrong
and 20% leaves
before you do
When you leave a job your 401(k) goes one of four ways, and which one suits you depends on your age and your plans. One thing is the same for everyone: the moment a cheque is made out to you, federal law withholds 20%, and you have 60 days to replace the whole amount. I walk you through that order, in Korean if you prefer.
It goes one of four ways
Which one suits you depends on your age and your plans. I put the numbers side by side.
Leave it where it is
It stays in the old employer plan. If the fees are low and the choices are good enough, that is a fair outcome. Small balances can be forced out automatically, so check yours.
Move it to the new employer
If the new plan accepts transfers it all sits in one place. Simpler to manage, but your choices stay inside whatever that employer picked.
Roll it into an IRA
This opens the widest set of choices, including lifetime income and principal-protected options, so the retirement income can actually be designed.
Cash it out
The whole amount is taxed as income that year, and before age 59 and a half there is a further 10% penalty. In almost every case this is the most expensive door.
How it goes
- 1
Look at the statement
Balance, annual fees, and how much is pre-tax versus Roth. Those three mostly settle whether to move at all.
- 2
Open the receiving account first
The IRA has to exist before the transfer can be requested.
- 3
Ask for a direct transfer
Tell the old plan’s administrator you want it sent institution to institution. Paid to you instead, 20% is withheld, and whatever you fall short by within 60 days is taxed as income that year.
- 4
Design it once it lands
Usually two to four weeks. Once it arrives we shape it around when you start and how much a month you need.
When it is better not to move it
Often the numbers say leave it alone, and I will tell you so.
If you left the job at 55 or later
If you were 55 or older in the year you separated, that employer’s 401(k) lets you withdraw without the 10% penalty before 59 and a half. Roll it to an IRA and that access is gone for good.
If you hold a lot of company stock
There is separate tax treatment worth checking before anything moves. Get the order wrong and it cannot be undone.
If the old plan is genuinely cheap
Large employer plans sometimes cost less than a retail IRA. I compare the numbers, and often the advice is to leave it alone.
- Will I owe tax?
- Moving a traditional 401(k) straight into a traditional IRA is not a taxable event. Converting to a Roth is, on the amount converted, in that year.
- What about my Roth 401(k)?
- Roth money goes to a Roth IRA and pre-tax money to a traditional IRA. They are split at the request stage so the two never mix.
- How long does it take?
- Usually two to four weeks, depending on how quickly the old plan’s administrator moves.
- I have more than one 401(k)
- They can be consolidated into one IRA, which is simpler to manage and far easier to plan withdrawals from.
- When do withdrawals become compulsory?
- Required minimum distributions start the year you turn 73. If you are still working and own less than 5% of that company, the current employer’s plan can wait until you retire.
One question is enough to start
A consultation does not oblige you to buy anything. Putting your situation in order is my job.
- 1
Call or email
Leave just a name and a number, and I will call you back.
- 2
We talk it through
Not a product pitch. I start with where you stand and what you want to know. Office visit or phone, whichever is easier.
- 3
You decide in your own time
I show you the carriers side by side. Talking it over with your family first is never too late.
