The percentage of U.S. workers who have changed or lost
their jobs in the last year is double the annual rate during the previous two
decades. And with that turnover comes a trail of orphaned 401(k) retirement
accounts.
Those who opt to take their money with them and roll it over
into a self-directed individual retirement account, or transfer it into a new
employer's 401(k) plan, are learning how arduous the process can sometimes be.
With so many 401(k) providers offering different plans that operate under an
assortment of rules, there's no uniform procedure for former employees who want
to move their retirement savings.
In turn, there are no clear-cut answers to common questions
such as: How do I transfer money in a 401(k) account under my maiden name? Do I
have to withhold anything for tax purposes? What do I do if I have company
stock in my 401(k)?
With the burden on participants to figure it all out, it's
no surprise that more often than not, they just give up and leave their 401(k)
accounts where they are.
And don't forget, it's generally a paper process to roll
over retirement funds. Most forms to shift a 401(k) still have to be completed
the old-fashioned way, and even if a retirement saver is successful in
completing the transfer, the money is typically delivered via mail as a paper
check. It's a woefully inefficient process for the 21st century, subject to
delays and with no easy way to get status updates.
Until the process becomes more standardized and digitized,
here are some things to keep in mind when deciding what to do with that 401(k)
money and to ensure you preserve as much of it as you can.
First, it's usually best to move the money as a direct
rollover, which means the funds will be headed straight for a new account, not
to the account holder. That way, the former employee doesn't have to have any
taxes withheld. The paper check may still be sent to the participant, but it
should be made out to, say, the new IRA custodian, rather than payable to the
account holder.
If the check is made out to the account holder, the clock
starts on a 60-day period for the money to make its way to the new account.
Beware, if you choose to take the money directly as a distribution, you're
subject to mandatory income tax withholding of 20%.
Also, remember, that if you've taken a loan from your
401(k), it's usually due when you leave your employer. If you can't pay it back
when you depart, it will be considered part of your taxable income, and you
could face an early withdrawal penalty depending on your age. While recent
legislation relaxed the rules around repayment for individuals who borrow from
their retirement accounts, loans are still due when employees move on.
For workers who have company stock in their 401(k)s, they
may be responsible for calculating the cost basis on that stock, or the
original value when they acquired it. If they roll over those funds, they
should consider whether it makes more sense to put the funds in a taxable or
non-taxable account, given special Internal Revenue Service rules governing the
treatment of company stock in retirement plans.
What if the name on the account needs to be changed — say,
the employee has gotten married? Unfortunately, questions about how to handle a
name change generally require a call to both the old 401(k) provider and to the
new custodian or provider. Be prepared to enlist the help of a notary.
Despite the hassles, it's still usually prudent to roll over
money from an old 401(k) into a new retirement account. Even if you're
organized and know you won't forget about it, if you've had multiple jobs and
retirement savings at each, there often isn't diversification among the
accounts in terms of what they're invested in and the risk level borne by each
one.
Still, if you think the fees are low enough, the investment
options are attractive enough, and you're willing to make sure you or a
financial adviser can help coordinate everything, you may just want to stay put
— especially if you'd be forced to liquidate holdings, which happens when
workplace plans offer options that aren't available to retail investors.
But in a final blow, check what the minimum balances are.
Some plans require account holders to have at least $1,000 invested, while
others require $5,000 to maintain plans once workers move on. Depending on the
size of your account, you may have no choice but to roll it over anyway.
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