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How to Roll Over Your Retirement Account When You Switch Jobs

Happy businesswoman leaving job with box of belongings.

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Switching jobs can be an exciting step in your career, but it also comes with its share of financial tasks. One crucial step you don’t want to overlook is rolling over your retirement account. Doing this correctly ensures that your savings continue to grow tax-deferred, avoiding unnecessary fees and penalties. Here’s a step-by-step guide to rolling over your retirement account when you switch jobs.

Understanding your options

When you leave a job, you have four primary options for your retirement account:

  • Leave the money in your old employer’s plan. This is often the easiest choice, but you may face higher fees and have limited investment options.
  • Cash out the account. While tempting, cashing out your retirement account can result in significant taxes and penalties. You could pay a 10% penalty on any withdrawals before age 59 1/2.
  • Roll over to your new employer’s plan. If your new employer offers a retirement plan, this can be a good option. It consolidates your accounts and keeps your retirement savings growing under one plan.
  • Roll over to an IRA. This option provides the most flexibility. You can choose from a wide range of investments in an IRA and usually benefit from lower fees.

Step 1: Evaluate your new employer’s plan

Before making a decision, check out your new employer’s retirement plan. Some key personal finance questions to consider include:

  • What are the fees associated with the plan?
  • What investment options are available?
  • Does the plan offer any employer matching contributions?

If your new employer’s plan is robust and low-cost, rolling over your old account to the new one can simplify your financial life and keep all your retirement savings in one place.

Step 2: Set up an IRA if needed

If you decide to roll over your account into an IRA, you’ll need to set one up. Here’s how.

  • Choose a financial institution. Look for one with low fees, a wide range of investment options, and good customer service. Popular choices include Vanguard, Fidelity, and Charles Schwab.
  • Open an IRA account. This can typically be done online in about 10 to 20 minutes. You’ll need to provide personal information and decide whether to open a traditional IRA or a Roth IRA. Remember, if your old account was a traditional 401(k), you’ll generally want to roll it over into a traditional IRA to avoid immediate taxes.

Step 3: Initiate the rollover

Once your IRA is set up, it’s time to roll over your funds. There are two main types of rollovers: direct and indirect.

  • Direct rollover: This is the preferred method. Your old plan administrator sends the funds directly to your new IRA or new employer’s plan. You won’t face any taxes or penalties, and your money remains tax-deferred.
  • Indirect rollover: Here, the funds are sent to you, and you have 60 days to deposit them into your new retirement account. Beware, your old employer will withhold 20% for taxes. You’ll need to make up this 20% out of pocket when depositing into the new account to avoid penalties.

Step 4: Avoid common pitfalls

Rolling over your retirement account can be straightforward, but it’s important to avoid these common mistakes.

  • Missing the 60-day deadline: If you’re doing an indirect rollover, make sure you deposit the funds into your new account within 60 days to avoid taxes and penalties.
  • Not making up the 20% withholding: If you receive the funds directly, your old employer will withhold 20% for taxes. You must deposit the entire amount of the old account balance into the new one, which means covering the 20% out of pocket until you get it back on your tax return.
  • Overlooking fees and investment options Not all retirement plans and IRAs are created equal. Be sure to compare fees and investment options to ensure you’re making the best choice for your financial future.

Rolling over your retirement account when switching jobs doesn’t have to be complicated. By understanding your options, evaluating your new employer’s plan, setting up an IRA if necessary, and avoiding common pitfalls, you can keep your retirement savings growing and secure. Taking these steps will help ensure a smoother transition and a brighter financial future.

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