I have changed employers recently, and I am trying to see what my options are as far as rolling over the money. The past employer's 401k website for me, says I can either rollover the whole amount, or withdraw the whole amount.
I understood from reading some material on the internet that my past employer 401k administator would charge 20% taxes, and then I would have to pay another 10% penalty. The account has less than 3000$ vested. I am wondering how is the past employer allowing me to get the whole amount even without a rollover. Just want to understand if I am missing a part of the equation here.
If you are withdrawing the money with the intent of spending or otherwise not putting it back into an IRA, you have the withholding, the penalty, and you have to pay personal taxes. That can amount upwards of 50% of the money. The best advice here is to not even consider that option.
The option that I would suggest is to do an "institution to institution rollover" into a rollover IRA account. You can go to a bank or stock broker, or most any financial institution and do this. The vendor that you pick will get the money directly from your 401K, and you never touch it. That way, there is no fees and no taxes. Most institutions have very low minimums and fess for these kinds of IRAs.
Once you have the money in an IRA account, you have to decide how to invest it. Go with stocks unless you have some reason not to. Most folks need the exposure to the market to avoid outliving their money.
You also may have the option of rolling your old 401K into the 401K at you new place of work. Check with the plan administrator at your new workplace.
The bottom line--never set yourself up to handle the check when moving 401K and IRA money around (not unless you really know the rules and know what you are doing). It is very easy to make a mistake that simply cannot be fixed.
Definitely roll it over. Open a roll over IRA account at an investment house (brokerage, mutual fund company, even a bank), and ask your 401K administrator to roll that money into the account.
That is only true if you withdraw the money instead of rolling it over. If you do a direct rollover into another qualified plan, there are no taxes due and no withdrawal penalty.
This is a fairly small amount of money, and you might find that it simplifies your long-term record-keeping and planning just to roll it over into your new employer's 401(k) plan instead of having to manage two accounts. Alternatively, if you already have a traditional (not Roth!) IRA, you can merge the money into that. The way to start is to ask the plan which will receive the money for a rollover contribution or rollover deposit form, and follow the instructions. A lot of time they arrange it for you so that you just give them information about your old account and you don't have to fill out a separate withdrawal form for that.
This may not be relevant in this case, but some institutions do not give you an option on how you want your equity transferred, as cash or as asset holdings. This recently happened to me with E-Trade. I used their form to transfer an IRA from usbancorp, expecting E-Trade to liquidate my holdings at usbancorp and transfer cash, thus avoiding trading fees at E-Trade since I intend to sell these assets. Instead, I now have shares of several mutual funds that I don't want. I may have no right to expect E-Trade to do this, but they are checking into it for me anyway. The option was definitely not on their transfer form (that's why they're checking into it). Had I been thinking, I would have gone to cash before transfering.
Relevant to anyone transferring, though, and a good thing to be aware of. I had a client shift from another advisor to a Schwab account, and there were funds there that were not part of the Schwab no-fee mutual funds, so she took a commission hit on the funds we decided to sell. Had it been done before the transfer, there would have been no fees. JOE
BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here.
All logos and trade names are the property of their respective owners.