When a relationship fades a time may come for making a change, and it’s not rare for retirement investors to find themselves looking for a more compatible providers.
A move may make sense if the 401(k) provider you were stuck with at work doesn’t look like the best match now that you’ve changed jobs or retired. Or maybe you find your individual retirement account trustee makes it hard to talk to a human, charges high fees, doesn’t have the funds or you want or doesn’t provide the investing advice you need.
“It makes sense to transfer accounts if you are paying high fees, have a plan that forces you to use expensive products, or have a limited option of investments available,” says Michelle Brownstein, director of private client services at Personal Capital, a wealth management firm in California and Colorado.
[See: 10 Long-Term Investing Strategies That Work.]
“It can also make sense to transfer accounts for consolidation purposes,” she says. “Having four 401(k)s from past employers at four different companies can be harder to track and manage than one consolidated rollover IRA.”
Funds in a 401(k) can be moved into a new employer’s 401(k) or into a rollover IRA that should allow you to buy just about any stock, bond or fund you want. Assets or cash in an IRA can be moved into a different IRA.
“This is a very hot topic right now due to many baby boomers retiring,” says Courtnie Nein, president of Good Life Advisors in Wyomissing, Pennsylvania.
First, Nein says, think about why you want to move.
“If you are moving your accounts it should be to improve performance, lower fees, receive better service, or create a strategy for you and your family,” she says. The move, for example, may be part of a strategy to change your asset allocation.
Nein and other experts say the key is to keep apples with apples. Assets in tax-favored accounts like 401(k)s and traditional IRAs should go into new accounts with the same tax treatment, while holdings in tax-free Roth accounts should go into new Roths. Tax-sheltered money should not be put into taxable accounts, else a tax bill may follow.
The goal is to avoid a “taxable event,” with a tax bill triggered on money that could continue to be sheltered from taxes.
Making a large withdrawal from a 401(k) or traditional IRA and then putting the proceeds into a new account could trigger a big income tax, for example, if the money is not put into a new tax-favored account within 60 days. And the old firm will probably withhold taxes when it sends you the check.
[See: 10 Costs You Can Eliminate in Retirement.]
“Cashing out your account value and taking a lump sum distribution from your 401(k) will incur a mandatory 20 percent withholding, as well as potential taxes and a 10 percent tax penalty for those under 59.5 years of age if not eligible for early distribution,” says Dan A. Ament, senior vice president at The Ament Group, Morgan Stanley Wealth Management in Wayzata, Minnesota.
Even if you put the entire check into the new account by the 60-day deadline, you’ll have to make up the 20 percent withholding out of other funds to avoid a tax bite, he adds.
The easiest way to avoid problems is to order a direct transfer from the old firm to the new one, which avoids the tax withholding or any other taxable event. Typically, this is done by filling out forms with the new company, on paper or online. That firm then deals with the old one. But the old one may also ask you to fill out a form authorizing the move.
Account holders generally have two options: an in-kind transfer that moves the actual holdings to the new account or a liquidation of the old account, converting all holdings to cash that is then sent to the new trustee.
Even if the old account has proprietary funds only that firm offers, it may be possible to move them to a new account in which it would not be possible to get those funds. They could still be sold later, of course, but it may not be possible to buy more, even with reinvested earnings. It’s best to ask both firms.
If you’re moving from a previous employer’s 401(k) to one with a new employer, the new account may well require a cash transfer, Ament says, but in-kind transfers are generally permitted from one IRA to another.
“You may wish to continue holding certain investments,” he says. “In addition, the ability to transfer in-kind and then make re-allocation decisions also keeps you invested versus liquidating an account and waiting for a transfer to be completed.”
While many financial transactions take place at light speed these days, shutting down one retirement account and opening another can sometimes take weeks, Brownstein says. In-kind transfers continue to enjoy investment gains while the process drones on, while a conversion to cash means your money is sidelined until it arrives in the new account and can be reinvested.
Whatever you do — cash transfer or in-kind — have an investment strategy for the new account before you make the move, Brownstein says.
[See: 10 Financial Perks of Getting Older.]
And talk to both firms about the process, since each will have an incentive to describe it in a self-serving light. The new firm will be eager to get your business, and the old one sorry to see it go.
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How to Transfer Your IRA or 401(k) originally appeared on usnews.com
