While the goal is to retain loyal employees (rather than constantly hiring and training), the reality is most Americans don’t stay in one job their whole lives. According to the Bureau of Labor Statistics, it turns out that the average person has 12 jobs over a 32-year span! Fortunately, 401(k) plans are portable. Do you know the benefits and penalties involved with each choice? It’s important to stay up to date so you can keep your team informed.
If a person decided to roll over their former employer’s 401(k) directly into a new employer’s plan, they’ll have to:
- Arrange the rollover with the new 401(k) plan administrator. They may have to select the investments they’d like to make before they complete the rollover. Otherwise, they can transfer the lump sum and allocate it gradually to investments of their choosing
- Complete the forms required to move their money from the former employer’s plan
- Ask their former plan administrator to send a check or electronically transmit the account value directly to the administrator of their new plan
When a person retires or leaves a job for any reason, they have the right to roll over 401(k) assets to an IRA. There are several direct rollover options:
Rolling a traditional 401(k) to a traditional IRA
They can roll traditional 401(k) assets into a new or existing traditional IRA. To initiate the rollover, one must complete the forms required by both the chosen IRA provider and 401(k) plan administrator. The money is moved directly, either electronically or by check. No taxes are due on the moved assets, and any new earnings accumulate tax deferred.
Rolling a Roth 401(k) to a Roth IRA
They can roll Roth 401(k) assets into a new or existing Roth IRA with a custodian of their choice. One must complete the forms required by the IRA provider and 401(k) plan administrator, and the money is moved directly either electronically or by check. No taxes are due when the money is moved and any new earnings accumulate tax deferred. Earnings are eligible for tax-free withdrawal once the IRA has been open for at least five years and the employee is at least 59½.
Rolling a traditional 401(k) to a Roth IRA
If a traditional 401(k) plan permits direct rollovers to a Roth IRA, they can roll over assets in their traditional 401(k) to a new or existing Roth IRA. Keep in mind they’ll have to pay taxes on the rollover amount they convert.
For 2022, 2021, 2020, and 2019, the total contributions a person makes each year to all of their traditional IRAs and Roth IRAs can’t be more than $6,000 ($7,000 if age 50 or older), or if less, your taxable compensation for the year. It’s a good idea to check in with your company’s plan administrator as well as a tax advisor to determine whether a move from a traditional 401(k) to a Roth IRA is allowed, and the right choice. RBT CPAs, LLP’s tax team has developed guidelines that help us perform client work as efficiently and effectively as possible. We assign experienced staff and gather industry knowledge from Firm resources and market research, to identify and target issues significant to your business. Contact us to set up a primary consultation to learn more about what we can do for you.