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Confused By IRA Rollovers? No Time? We Can Help

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February 29, 2016

A job change can be an exciting opportunity and yet one of life's high-stress situations. When changing jobs, it's easy to forget about your old 401(k). If you've changed jobs a lot, and left your retirement plans with previous employers, this can prevent you from giving your savings the attention it deserves.

It's important to know you have options when it comes to an old 401(k). You can leave it with a previous employer, take it with you to a new employer, take a cash distribution that'll likely incur taxes and possibly penalties, or move it to a rollover IRA.

Helping investors to understand IRA rollovers, and the emotions involved in the process, is driving new research at TD Ameritrade. It's clear that despite industry efforts to smooth the process, many investors still feel stuck. They're unclear about the potential benefits and they're foggy on what's required of the job-changer. Here, we dig in to some of the research findings and address those results with the typically simple and beneficial solutions that rollovers can offer many investors.

Sentiment around Rollovers?

It’s mixed, actually. About one-third of polling respondents said they had never rolled a 401(k) plan to an IRA, and only a small minority said they’d consider rolling over the next year. Why? They say there’s no compelling reason to do so, particularly if they’re satisfied with their current plan provider’s investment selections, performance, and with current management of their plan.

Some respondents took comfort in keeping their several 401(k)s across many old jobs separate; they considered diversity of provider and administrator an important approach to “diverse investing” overall, even if they were unclear whether those plans were spread across a diverse grouping of fund type or approach. Some respondents simply like their current investment formula and some respondents simply like their current investment formula and don't want to change it.

Now remember, for many investors this applies to old 401(k)s, meaning those no longer receiving a company funding match. And that brings us to a major reason for rollover reluctance: inertia. Good or bad, it often defines our lives. You know what the survey also uncovered? Once moved to action, sentiment changed. Of the respondents who had completed a rollover, many felt empowered and excited to take back some control of their investments.

So Why Roll?

Although this article discusses the aspects of rolling over an old 401(k), a rollover is not your only alternative. Investors should consider various factors before making a decision.

Beware Cashing Out. True, it’s your money and you can do whatever you want with that old 401(k), but cashing out triggers applicable taxes and penalties depending on your age and circumstances. Understand the implications before you act.

True Diversification. Many investors see a catalog of fund offerings in 401(k) marketing materials and end the conversation there. Ask yourself an important question: Is there enough plan variety with your specific 401(k)? Plus, leaving one or more 401(k)s open does not necessarily provide diversification. In fact, investors typically access more funds and investing solutions, including potential tax advantages, from an IRA.

Not a Taxable Event, But … When rolling funds from an employer-sponsored plan to your IRA, you can avoid mandatory tax withholding by requesting a direct rollover. In this case, although the check may be mailed to you, it will be made payable directly to your new trustee or custodian. If, on the other hand, the assets are distributed in your name, you have 60 days to re-deposit them in a plan or face taxes and other penalties. Take a look at our archived article exploring rollover tax implications and more.

Not All-or-Nothing. An IRA with a single provider offers access to potentially lower fee solutions and the ability to have all assets under one roof for better management and maintenance. You can use an IRA rollover to move just a portion of your funds from one IRA to another, or to roll over part of a qualified retirement plan to an IRA. Although you can opt for a rollover at any age, there are a couple of age targets to keep in mind. You can begin taking IRA distributions after turning age 59½. That differs from 401(k)s, which you can tap beginning at 55. If you need that added age flexibility, you may consider leaving some funds in a 401(k). 

Painless. Really. The process is not as cumbersome as it may sound. Survey respondents widely reported fewer negative emotions associated with the process after the fact compared to emotions felt prior to rolling over. Your own experience can hinge on the level of communication and support in handling rollover details efficiently. Ask questions. Engage your rollover representative in making the call for you if you prefer. There are several ways to help ensure your rollover is as smooth as possible. TD Ameritrade can help you through the process from beginning to end.

Need More Incentive?

How’s this sound? Get up to $600 when you roll over your old 401(k) with TD Ameritrade depending on the size of your deposit.