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401(k) to IRA Rollover

401(k)’s, IRA’s Rollovers, and YOU!

Written by Carson Hamill CIM®, CRPC®, Associate Financial Advisor & Dean Moro BComm, CIM®, Associate Financial Advisor

Investing can be complicated at the best of times. Rolling over your 401(k) to an IRA doesn’t have to be complicated. We have a number of steps and pointers to help answer some questions. However, always speak to a tax professional before making any major changes to your investment plan. 

What is a 401(k) and an IRA?

What is a Rollover IRA?

What are some reasons for transitioning your 401(k)?

What are your options?

What are the implications for estate planning?

What are some advantages to having a 401(k)?

What are some limitations of the 401(k) to IRA Rollover?

What are some limitations on contributing to a Rollover IRA?

FAQ about Rollovers, 401(k)’s and IRA’s

What is a 401(k) and an IRA?

A 401(k) is a company sponsored employee pension plan. A 401(k) lets you make annual contributions and offers tax benefits while saving for the future.

An IRA, on the other hand, is an Individual Retirement Account that is started and maintained by the individual.

What is a Rollover IRA?

First things first: What is a 401(k) to Rollover IRA? A 401(k) to Rollover IRA is when you transfer your 401(k) assets from a previous employer’s pension plan, or multiple 401(k) plans, into an Individual Retirement Account (IRA). This helps simplify your situation and helps make your financial planning easier.

What are some reasons for transitioning your 401(k)?

Now that we know what “rolling over” means; what are some reasons for transitioning your 401(k) to a Rollover IRA? There are a number of reasons, including consolidation of your retirement accounts which makes managing your assets easier. This also allows your investments to be actively managed without any restrictions and provides you with more investment options. And importantly, it is less complex for beneficiaries and provides for estate planning benefits.

What are your options?

So, you are ready to consider your options - what are they? 401(k) plans may have restrictions; and with a 401(k) plan, you'll have only the investment choices available in that specific employer’s plan. So, it depends on how much control you want over your investments. In your 401(k), your employer controls almost everything. Employers choose vendors for the plan and determine the investment lineup.

With an IRA, you will have more investment choices and greater control than your old 401(k) plan did. You will not be restricted in what types of investments you hold and will have freedom to allocate the portfolio in a way that works for you.

It is important to ensure your accounts are set up properly and actively managed. Your 401(k) may become frozen once you settle in Canada due to the US financial institution not being licensed to work with residents of Canada. It is against Security Exchange Commission (SEC) guidelines for the investment company to deliver advice to non-US residents. And generally, once you update your residential address with your 401(k) provider, you will be notified of the account’s restricted status.

If you are planning on moving to Canada or have already arrived and are considering consolidating your accounts, consider these advantages:

  • More effective financial planning
  • Active investment management
  • Regular rebalancing of your investments
  • Fewer statements, usernames & passwords
  • More accurate estate planning

What are the implications for Estate Planning?

When it comes to Estate Planning, it is best to have nothing left to chance. As always, it is important to consult a lawyer experienced in cross-border estate planning. And you’ll want to ensure you are working with a team that includes your cross-border accountant, and an advisor that is dual licensed with experience in cross-border investment management.

Upon death, there may be a chance your 401(k) will be paid in one lump sum to your beneficiary, resulting in income and inheritance tax headaches. Rules vary depending on the plan however, unlike IRAs, 401(k) plan administrators will often want to disburse cash quickly therefore, the account is off the books. Remember to consult with your plan administrator to hear your options.

What are some advantages to having a 401(k)?

There are pros and cons to a 401(k). Here are some of the benefits:

  • Distributions at 55 years old:
    • Exceptions to the 10% early withdrawal penalty. For Instance – once you have stopped working for your company you may have the option to withdraw money out of your plan at age 55 versus waiting until age 59 ½, without paying the 10% early withdrawal penalty (please check with plan administrator).
  • Employee Retirement Income Security Act (ERISA) Protection
    • Your 401(k) may offer ERISA creditor protection. ERISA is a federal law that protects the retirement assets of American workers
    • IRA’s do not receive creditor protection under ERISA. However, IRA’s do receive creditor protection under state law

What are some limitations of the 401(k) to IRA Rollover?

Now that you are starting to get a handle on rollovers; it's good to know there are some limitations for 401(k) to IRA Rollovers. If you're under age 50, your maximum 401(k) contribution is $20,500 in 2022. That number rises to $22,500 in 2023. If you're 50 or older, your maximum 401(k) contribution is $27,000 in 2022, because you're allowed $6,500 in catch-up contributions.

IRA’s, on the other hand, limit contributions to $6,000 in 2022 and in 2023 you can contribute up to $6,500. If you are 50 or older by the end of 2022, you may contribute up to $7,000 to an IRA in that year. There is no limit to how much you can roll into an IRA from a 401(k).

What are some limitations on contributing to a Rollover IRA?

There are some limitations on contributing to a Rollover IRA. In 2021 and 2022, contributions are limited to $6,000 per year ($7,000 if you're age 50 or older). Your ability to deduct traditional IRA contributions from your taxes each year may be restricted if you or your spouse has access to a workplace retirement plan and you earn over a certain threshold. Remember to consult a cross-border accountant.

One common question is “Can you roll a 401(k) into an IRA without a penalty?”. While you’re still employed distributions from a 401(k) are restricted before the age of 59 ½. Once you have left your employer you will have access to your 401(k) assets regardless of your age. Take into consideration that if you do not do a Direct Rollover or Indirect Rollover, and you cash out the 401(k) account, you are obligated to pay taxes and a penalty if you are under 59 ½ years old.

There are two types of rollovers: Direct Rollover & the Indirect Rollover:

  1. Direct Rollover:
  • The money is moved directly between accounts without its owner ever touching it
  1. Indirect Rollover:
  • The funds are given to the employee directly for deposit into a personal IRA account
  • Must deposit the funds from your 401(k) plan to another retirement account within 60 days
  • It is best to move the funds directly from institution to institution due to there being no 60 day rule or mandatory 20% withholding tax

FAQ about Rollovers

How long does a rollover take?

Typically, a rollover can be processed within 2 - 4 weeks 

Do I have to select my investments for the IRA right away once the rollover is completed?

No. The money from the check will be automatically deposited into your IRA's settlement fund. You can then choose how to invest your assets after the money has been deposited to your account.

Can money be taken out of an IRA before retirement? 

Yes. Additionally, you are not required to repay it like you would with a loan from a plan offered by your company. However, withdrawals made prior to the age of 59½ may have negative effects. For a Traditional IRA, withdrawals made before the age of 59½ are subject to a 10% Federal penalty tax.

What are the fees associated with a 401(k) plan?

There are costs associated with Investment strategies and plan administration. Employers are required by the U.S. Department of Labor regulation 408(b)(2) to disclose fees, which include:

  • Investment Expense Ratios
  • Plans' provider costs
  • Administrative charges
  • Additional costs for each participant

If I do a Rollover, will my fees change?

The Financial Industry Regulatory Authority (FINRA) mandates that every investment professional disclose the cost of each investment. Additionally, they must give adequate information so that the investor is aware of their financial obligations. Fees will vary according to different plans.

Can I add more money to my IRA later?

Yes, you may consolidate assets from other IRAs or past employer-sponsored retirement plans into your IRA. You can also make yearly contributions. Some people opt to contribute to their IRA on a yearly basis in order to manage just one account. If you don't want to roll these assets back into a qualified retirement plan with a future employer, this may be the best option for you. Although assets may be mixed together and still be eligible to roll over into another employer plan in the future, the recipient plan will decide what kinds of assets can be transferred.

How much of my compensation can I commit to a 401(k)?

There may be restrictions on how much of your salary you may contribute under your 401(k) plan. You should consult your employer’s Summary Plan Description (SPD) from your enrollment paperwork to learn such constraints.

Can I stop making contributions to my 401(k) at any time if I sign up for my company's 401(k) plan but subsequently change my mind?

You can choose to stop funding your 401(k) plan at any time. Contact your Human Resources representative to get the necessary forms. Until one of the requirements that would allow you to access a distribution from your plan is met, the money you have already paid to the plan must remain there.

How do the funds of a 401(k) get invested?

You can choose the investment profile that will enable you to achieve your unique retirement objectives. Often the employer chooses the available investment options from the plan provider. Additionally, you can move money between the various investment options. For a list of the fund options offered by your plan, consult your registration papers.

In Conclusion

Your retirement savings are crucial. It is important to understand all of your options. Always check with your financial advisor and consult an accountant before making any changes. Both rollovers and Roth conversions have various benefits and drawbacks. Therefore, it is always best to do your research, understand the rules and regulations, and always get professional guidance.

Next Steps

If you’re planning on moving to Canada and need assistance with your investments, estate planning, and portfolio management, please call or email us at Snowbirds Wealth Management as we specialize in cross-border financial planning and wealth management. We work closely with experienced cross-border lawyers and accountants to ensure you have a team behind you.

About Snowbirds Wealth Management

Gerry Scott is a portfolio manager and founder of Snowbirds Wealth Management, an advisory firm focussed on the cross-border market. Together with Dean Moro & Carson Hamill, associate financial advisors with Snowbirds Wealth Management, they provide investment solutions for Americans living in Canada, and Canadians residing in the United States. Licensed in both Canada and the US, they provide tailored investment solutions to minimize the tax burden when moving assets across borders. To schedule an introductory call, Click Here.

Statistics and factual data and other information are from sources RJLU believes to be reliable but their accuracy cannot be guaranteed. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities nor is it meant to replace legal, accounting, taxation or other professional advice. We are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters. The information is furnished on the basis and understanding that RJLU is to be under no liability whatsoever in respect thereof.

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