How long have you been with your employer? And how long do you plan to stay there? As a millennial, you may have a feeling of restlessness. An article from Forbes argues that job hopping is the new normal for millennials. And the most recent data released by the Bureau of Labor Statistics states that employees tend to stay with their current employer an average of 4.6 years.
If you have been with your company for a few years, you are probably thinking of that next step. It is important to continue to grow your career and stretch yourself in the process. You may decide to continue your education and go back to college or start a professional certification. Maybe you are thinking of taking some time off to travel and discover what you truly have a desire to do. It is possible that you've realized that you can support yourself with your side hustle and you are ready to become a full time entrepreneur.
During your time with your employer you have likely contributed to the retirement plan. If your company offers a match program for retirement contributions, you likely contributed to take advantage of the free money.
Staying with your employer? Click here to watch why free money should make you dance.
Now that you are thinking of leaving, you wonder, “What happens to all of that money in my 401(k)?”
It’s your money. And you can take it with you.
And that’s where the Rollover IRA comes in.
The Rollover IRA
As an avid reader of Young Finances, you've heard of the Roth IRA and the Traditional IRA. You know that IRA stands for Individual Retirement Account and that it is a savings vehicle designed to help you save for retirement. You know that you will need to designate a beneficiary and that I have a preference when it comes to tax free money.
But I have yet to mention the Rollover IRA.
A Rollover IRA, also known as rollover, is simply a transfer of funds from a retirement account such as a 401 (k) into a Traditional or Roth IRA.
Let’s assume that you have already left your job. Starting a rollover will allow you to move assets from a 401(k) at your old employer into a brand spanking new IRA, Traditional or Roth. In essence, you would contact the administrator that holds your 401(k) and let them know that you want to rollover. They would close out your 401(k), cut you a check and you have 60 days to deposit that into an IRA account that you open.
The Rollover Tax Question
Of course, when dealing with retirement distributions, you have to consider the tax implications. Let’s see what the Internal Revenue Service has to say about it.
Will taxes be withheld from my distribution?
IRAs: IRA distributions paid to you are subject to 10% withholding unless you elect out of withholding or choose to have a different amount withheld. Withholding does not apply if the distribution is paid directly to another IRA trustee.
Retirement plans: A retirement plan distribution paid to you is subject to mandatory withholding of 20%, even if you intend to roll it over later. Withholding does not apply if you roll over the amount directly to another retirement account. A distribution sent to you in the form of a check payable to the receiving plan or IRA is not subject to withholding.
Well there you have it. Directly from Uncle Sam himself.
Tax withholding can be avoided if you roll over the distribution from a retirement plan directly to another retirement account.
You may also be thinking, why should I roll over?
Why not take the distribution, pay the tax penalty and buy a yacht to travel the world?
When you roll over a retirement plan distribution, you generally don’t have to pay tax on it until you withdraw it from the new plan. By rolling over, you are saving for your future and your money continues to grow tax-free.
If you want to allow your money to grow tax-free then a rollover may be right for you.
Ready to Rollover Your IRA?
I've discussed Betterment here at Young Finances several times. I have a Roth IRA with them and a few sub accounts dedicated to travel, long term investing and a recent investing challenge. I like them because they provide an easy way to invest with low costs. Betterment portfolios are customized based on your personal preferences and risk tolerance and they work around the clock optimizing returns at every level of risk.
It’s free to roll over 401(k) assets or an IRA to Betterment. There are no trading costs and portfolios contain cost-efficient index funds.
They make things easy.
To transfer your 401(k) assets, the direct rollover method is used which prevents any withholding or tax consequences.
Betterment also provides a rollover concierge to you and they are available to speak to your current 401(k) or IRA provider to make sure the transition of assets is completed smoothly.
Not rolling over? Open a Betterment account today and get a month free.
Something that could take days and tons of paperwork is made easy with Betterment. Instead of an overwhelming, time-consuming process, Betterment takes steps to ensure your money is put to work in an optimized portfolio as soon as possible.
Now that you know how easy it is to roll over, what job will you look for next? Or would you rather take a year to travel the world?