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401(k) Challenges

How to Roll Over Retirement Accounts

Articles by Betterment Editors

By the Editorial Staff
Betterment Resource Center  |  Published: September 1, 2018


TABLE OF CONTENTS

General Questions

401(k) Rollovers

IRA Rollovers

Final Steps


What is the difference between a 401(k) and an IRA?

You can, and probably will, end up having multiple retirement accounts, but there are many benefits to maximizing your 401(k) contributions. The biggest difference between the two is contribution limits: an individual can contribute up to $18,000 to their 401(k) account ($24,000 if they are 50 or older), whereas the contribution limit on IRAs is $5,500. If your employer matches your employee deferral contributions, this increases the amount that you are able to save for retirement each year via 401(k).

Generally speaking, you can have both a 401(k) and an IRA.

Is it possible to roll over my previous 401(k) or an IRA?

Yes! Betterment makes rollovers simple and efficient, minimizing your time spent and keeping costs low so we can maximize your money’s growth. Our rollover process is among the fastest in the industry. To get started, click here.

It is important to note that when deciding whether to roll over an old 401(k) account or other retirement account, you should carefully consider your personal situation and preferences. Relevant factors may include that: (i) 401(k) accounts may offer greater protection from creditors than IRAs. (ii) In some cases, the ability to take penalty-free distributions at an earlier age or to defer minimum required distributions. (iii) Some 401(k) accounts may also allow for loans or distributions in a broader set of circumstances than IRAs. (iv) Some 401(k) plans may also offer specific educational and advisory services to participants that are unavailable to some IRAs. (v) Some 401(k) plans may have lower fees and expenses than some IRAs. (vi) Some IRAs may offer a broader range of investment options that some 401(k) plans. (vii) Special tax rules may apply to the rollover of employer securities.

You should research the details of your previous 401(k) and speak to a tax and/or other advisors about whether the features of your 401(k) are relevant to your personal situation. The rollover process is currently automated for rollovers from select providers. If you have a provider that is not part of our automated process, you will receive an email with a checklist for completing your rollover to Betterment. In processing you rollover request, Betterment will be acting at your direction.

Should I roll my funds into my 401(k) or IRA account at Betterment?

If your employer offers a 401(k) through Betterment that permits rollovers into the plan, you have the option to roll your old 401(k) into your new 401(k), or roll it into an IRA. The right decision for you depends on many different factors.

This is a general, educational guide that defines the major differences between a Betterment 401(k) and Betterment IRA. It is not a comprehensive list, nor is it a recommendation as to what any particular Betterment customer should do. Some of these factors may be of importance to you, while others may not apply at all. After reading this guide, if you’re still unsure what to do, we encourage you to speak with a financial advisor about your specific needs.

Ownership

IRAs are individually-owned retirement accounts that anyone can open to roll retirement funds into. A 401(k) account is slightly different. 401(k)s are offered through your employer, and the funds inside the account are actually part of a trust that is managed for you and all other employees. This difference in ownership is a key distinction. You and only you own your IRA, and thus you generally have greater control and flexibility. You do not own your 401(k) outright, and thus generally have less control but greater protection. We will explore specific examples of these tradeoffs in greater detail below.

Fees

Betterment’s IRAs and 401(k)s have different fees attached to them. A Betterment IRA will be subject to an advisory fee of 0.25% – 0.50% per year. This is the only fee you will pay Betterment. There are never any trading costs or fees to deposit/withdraw money. You can read more here.

401(k) accounts have greater regulatory and filing costs associated with them, which typically translates into higher overall fees, both to Betterment and to any additional service providers hired by your company. However, your employer may pay some or all of those fees on your behalf, potentially making your own fees cheaper than an IRA. You should analyze your fees to determine whether rolling money into your Betterment 401(k) or IRA would be more cost effective. Please contact us if you’re unsure of what your fees are.

While fund costs are generally an important part of assessing your total fees, the portfolios in the Betterment 401(k) and Betterment IRAs are exactly the same, and fund costs are thus not discussed in this section.

Required Minimum Distributions (RMDs)

Both IRAs and 401(k)s force you to begin withdrawing money once you reach age 70 ½. Most of the time this money is from pre-tax contributions, meaning that every dollar you withdraw for your RMDs will be taxable as ordinary income.

However, if you are still working at age 70 ½ you may be allowed to delay your 401(k) RMDs until the year in which you retire. This can be helpful if you plan to work well into your 70’s and thus will not need the RMD income to support your lifestyle. Allowing that money to stay invested and grow tax-deferred can be a significant benefit.

IRAs have no such exception to RMDs. Even if you are still working, you must take your RMD from any money you have in an IRA. Also note that while Roth IRAs do not have RMDs, Roth 401(k)s do.

Accessibility

Both IRAs and 401(k)s are retirement accounts, and per IRS rules, generally can only be accessed after age 59 ½. However, there are exceptions to this rule, and these vary between IRAs and 401(k)s. If you may need access to your funds before 59 ½, these exceptions can be an important factor in determining which account to roll your money into. We strongly encourage you to carefully review the differences between the exceptions for both accounts here, but we’ll explore some of the more important details below.

With Betterment IRAs, you can always withdraw your funds without any fees. However, doing so before age 59 ½  may lead to taxes, as well as a 10% penalty. A list of exceptions to this 10% penalty on early IRA withdrawals can be found here. Some common examples include qualified education/medical expenses, qualified first-time home purchase, or if you become disabled.

401(k) plans have a different set of rules. You generally cannot make withdrawals from your Betterment 401(k) while you are still working at the company that sponsored the 401(k). An exception to this rule is if you are still working but have reached age 59 ½. This is called an in-service distribution and will be subject to a $75 fee per distribution payment.

One benefit to a 401(k) is that it may allow you to begin withdrawing money penalty-free if you leave your job at age 55. This is almost 5 years earlier than if that money was in an IRA.

Some 401(k) plans allow you to take loans and borrow against your own assets. IRAs do not allow loans under any circumstances. 401(k) accounts can also offer “hardship distributions”, where you are permitted to take a withdrawal under specific circumstances (as defined by the IRS) even while employed, though the distribution may still be subject to a 10% penalty if you are under age 59 ½. Both loans and hardship distributions from a Betterment 401(k) are subject to approval by your employer, and will be subject to a $75 fee per distribution payment. Please contact us if you’re unsure whether your Betterment 401(k) offers loans or hardship distributions.

Roth Conversions

If you plan on converting non-deductible Traditional IRA to a Roth (sometimes referred to as a “backdoor Roth contribution”), you may want to consider rolling into your 401(k) and not your IRA because of the IRS pro-rata rule. You can see an example of this rule here. Putting the pre-tax funds into your Betterment IRA will reduce the effectiveness of the backdoor Roth and may lead to more taxes.

However, if you plan on converting your pre-tax 401(k) contributions after you roll them over,. you should know that Betterment 401(k) plans do not allow you to convert your Traditional funds into Roth funds at this time. Betterment IRA accounts do allow you to easily complete a conversion directly on the website.

Employer Stock in Your 401(k)

If you hold stock of the company you work for in your 401(k), you may be eligible for a strategy called Net Unrealized Appreciation (NUA). The purpose is to save you money on taxes.

Essentially, the strategy involves moving the employer stock to a taxable investment account. When you do this, you generally pay ordinary income taxes up to the cost basis of the stock, which you would pay anyways when you withdrew the money from your 401(k). However, all future growth will be taxed at the lower long term capital gains rates. If instead you immediately roll all the money into an IRA, you lose the chance to do the NUA strategy which could save you considerable money in taxes. Any remaining money that was not invested in employer stock can be rolled into a 401(k) or IRA. This is a complex strategy and requires a thorough analysis of your tax situation and risk tolerance. We recommend speaking with a tax professional if you are considering this strategy.

Distributions from Roth IRAs and 401(k)s

For both Roth 401(k)s and Roth IRAs, you’ll need to reach age 59 ½ and generally have owned the account for at least five years before you can take distributions tax and penalty free. If you are under age 59 ½ or started contributing less than five years ago, there are important differences to consider in the distribution rules for IRAs and 401(k)s.

Roth IRA contributions can still generally be withdrawn first without any penalty or any taxes owed. In contrast, Roth 401(k) withdrawals follow a less favorable pro-rata rule. Any Roth 401(k) distribution must be a mixture of both post-tax contributions and pre-tax earnings, relative to the total balance of each in your account, so you may owe taxes and a 10% penalty on the earnings portion.

Additionally, rolling your Roth funds between retirement plans may extend or restart the five year clock, based on the type of accounts between which you are moving. This may impact the taxation of your withdrawal of your earnings, even if you are over the age of 59 ½. You can read a more detailed analysis of the various five year rules here.

Finally, please note that the IRS does not allow you to roll a Roth IRA into a Roth 401(k). Only Roth 401(k)s can be rolled into your Betterment Roth 401(k).

Lawsuit and Bankruptcy Protection

In general, federal law governs employer sponsored plans while state law governs IRA accounts. Protection for the accounts can vary based on the state that you live in, so if these issues are a concern for you, we recommend speaking with a trusted legal advisor.

Services

If you have a 401(k), you may receive advisory and financial services from your former employer or from a third-party service provider. These services may include  workshops, educational materials and even individual financial planning. If you do receive such services, they may no longer be available to you if you roll over your 401(k) to an IRA. Betterment generally offers the same advisory services to  401(k) and IRA customers, and this is discussed in further detail below, under the “Similarities” section.

Similarities

Whether you choose an IRA or 401(k) within Betterment, you’ll get the same easy-to-use website and advice features. Not only do we use the same low cost, passive index funds in both accounts, but we also provide customized advice about your asset allocation and whether you’re on track for retirement. We also offer a wealth of knowledge in our Resource Center.

Rollovers don’t count towards your contribution limit, so while IRAs and 401(k)s have vastly different limits, you don’t have to consider them here. Both accounts allow you to enter in beneficiaries easily on our website, and finally, both accounts preserve the tax-advantaged nature of your funds.

Can I transfer or roll over an inherited IRA / 401(k) or other retirement plan?

Yes, you can transfer an inherited retirement plan. The process is called a trustee-to-trustee transfer. Your current provider will send us a check of your funds directly, for your benefit. We will assist you throughout the whole transfer and set up process, so if you’d like to get started, please email us.

With Inherited IRAs, you may need to take Required Minimum Distributions (RMDs). At this time, Betterment does not automate calculation of RMDs, though we hope to provide this feature in the future.

You will need to calculate your RMD by reviewing the “IRA beneficiaries” section of IRS Publication 590. We will provide the fair market value of your IRA by December 31st of every year with your tax forms, and you can calculate your RMD using this amount.

According to IRS rules, you will not be able to contribute further to your Inherited IRA at Betterment.

How can I roll over my 401(k) into Betterment?

This entails your current provider sending us a check of your funds directly, for your benefit. To get started, click here.

You’ll answer a couple of questions, and receive an email with the full, personalized instructions (how the check should be issued and where it should be sent) to complete your rollover.

Please note that Traditional funds must be rolled over into a Traditional IRA and Roth funds must be rolled over into a Roth IRA. If you aren’t sure which type(s) of funds you have, contact your current provider or HR representative. You can always convert a Traditional IRA into a Roth IRA after the rollover.

To see if your retirement plan is eligible to be rolled over into a Roth or Traditional IRA, please check the IRS Rollover Chart. You can also check out our guide to retirement plans.

These instructions only apply if you’d like to roll your funds into a Betterment IRA. If you’d like to transfer funds to an existing Betterment 401(k) plan through your employer, please contact us at support@betterment.com for separate instructions.

Can I roll over my active 401(k) (or other employer-sponsored plan) into Betterment?

Your plan provider likely will not let you roll over a 401(k) while it is still active. This same logic applies to 403(b)s, Pensions and other employer-sponsored retirement plans. For most providers, they require you to be retired or no longer employed at the company to be allowed to roll over retirement funds. Ask your provider to see what their rules are.

Can I have a Betterment account in addition to my 401(k) account?

Great question! Betterment makes it easy to manage all of your assets holistically, and we provide advice accordingly. When you’re logged into your Betterment 401(k) account, click “Add New” on the left of your Profile. You’ll be able to add a taxable, IRA, joint or trust account. You can also sync external accounts so that your personalized advice is based on an even more holistic financial picture.

How do I perform an IRA transfer or rollover?

Betterment uses a direct transfer process to roll over existing IRAs into Betterment IRA accounts. These transfers are non-reportable transactions, which avoids any tax consequences for the user.  In a direct transfer, your current IRA provider generally sends Betterment a check or wire for the value of your account.

To get started, go to the Transfer page of your Betterment account and click “Rollover”. You’ll answer a few questions and receive full instructions to complete your IRA transfer, based on your provider’s requirements. You’ll need to sign transfer paperwork that Betterment provides, and send that your provider.

If you have a special retirement plan, such as an inherited IRA, please contact us at rollovers@betterment.com and we can guide you through the process.

These instructions only apply if you’d like to roll your funds into a Betterment IRA. If you’d like to transfer funds into an existing Betterment 401(k) plan through your employer, please contact us at support@betterment.com for separate instructions.

Which providers are supported by Betterment’s e-fax IRA rollover process?

* American First

* Benefit Plans Administrative Services

* Blackrock

* BMO Harris Bank

* Capital One Bank

* Cetera Advisor Networks

* Charles Schwab

* CIT Bank

* Commonwealth Financial Services

* Community America Credit Union

* Contra Costa Federal Credit Union

* Edward Jones

* Exeter Trust Company

* Fidelity

* First Trust Company of Onaga

* Franklin Templeton

* FTJ Fundchoice, Interactive Brokers

* HSBC

* Invesco Investment Services

* Jackson

* Janus

* John Hancock Qualified Annuity

* Lincoln Financial

* Mass Mutual

* Michigan State University FCU

* Morgan Stanley

* Nationwide Financial

* Northcoast Asset Management

* Oppenheimer

* Options House

* OptionsXpress

* Pacific Life

* Penn Mutual

* Pentagon Federal Credit Union

* Publix Employees Federal Credit Union

* Quest IRA

* Raymond James

* RBC

* Self Directed IRA Services

* Sterne Agee

* SunTrust

* Thrivent Financial

* TradePMR

* Trust Company of America

* Virtus Investment Partners

* Voya

* Waddell & Reed

* Whitney Bank

* Woodbury Financial Services

Why do I need to sell my investments at my current IRA provider?

If you want to transfer your IRA to Betterment, you will need to sell your investments. Before we can invest your retirement funds in our fully diversified portfolio, you will need to sell your current holdings at your current IRA provider. Many providers will not accept our liquidation instructions so this will help facilitate this process.

Selling your investments at your current provider is often quicker and lower cost than Betterment authorizing this on your behalf. Please note, selling your investments will not result in a taxable event.

How do I use the indirect rollover process to move my IRA into Betterment?

The indirect rollover process involves withdrawing from your current IRA and re-depositing the funds into another IRA within 60 days. The rule limits the use of an indirect rollover process to once per individual per 12 month period. If you have used this method in the past 12 months, here are instructions to the direct transfer process instead.

This method avoids any negative tax consequences and there are just two easy steps:

  1. Ask your provider for an early distribution with no withholding. Your provider may call it a “premature distribution”, and this is the same thing. Again – there are no negative tax consequences for this.
  2. Deposit that money into your Betterment IRA within 60 days to avoid tax penalties. Log in and go to the Transfer tab. Enter the amount of your rollover and select “IRA Rollover” as the contribution type:

Exceptions & Special Conditions:

  • The 12 Month Rule. If you have used the indirect rollover method in the last 12 months, there could be further IRS restrictions. Let us know if this applies to you, and we’ll walk you through a direct transfer.
  • Note on Form 1040 at Tax Time. Note your rollover on Form 1040 using the 1099-R your old provider will give you when you file your taxes for this year. Betterment will not give you any tax forms, but will report your rollover contributions to the IRS directly in May on Form 5498.
  • Same-Type Rule. You can only roll over between IRAs of the same type. A Traditional IRA, SIMPLE IRA or SEP IRA can only be rolled over into a Betterment Traditional IRA. A Roth IRA can only be rolled over another Roth IRA.
  • Contribution Limit. Rollover contributions do not count towards your IRA contribution limit, since you’re only moving over funds not adding to them.
  • Simple IRAs. Note that you cannot roll out a SIMPLE IRA before you’ve held the account for at least two years, according to IRS rules.
  • Spousal IRAs. Note that you cannot roll over a spouse’s IRA into your Betterment account – your spouse will need to create their own Betterment account to roll their IRA into.
  • Inherited IRAs and Annuities – If you are rolling over an Inherited IRA or a qualified annuity, we’ll do a trustee-to-trustee transfer instead, to avoid negative tax consequences. Please contact us to get started. You can read more about rolling over inherited IRAs into Betterment here.  To read more about this process and to find specific answers to your tax questions, refer to the IRS Publication 590.

Can I transfer or roll over my existing SEP IRA to Betterment?

Yes. Simply click here to start the process. There are no negative tax consequences for a direct transfer.

Can I transfer my spouse’s IRA into my own?

You cannot roll over a spouse’s IRA into your Betterment account, as the IRS does not allow for joint ownership of IRAs. Your spouse will need to create their own Betterment account to roll their IRA into.

If you and your spouse want to sign up for individual accounts, we can “household” the two accounts which will combine your balances for the purposes of meeting minimum balance requirements at our various pricing plans. Please email us with both of your email addresses if you would like to “household” your accounts, and we will make the necessary changes on our end.

Additionally, we do allow you to add account beneficiaries. This would give the indicated beneficiary immediate ownership and transfer rights should anything happen to you. You can edit this at any time by clicking “Settings” on the top right hand side of the page, then “Accounts” from the sub-header. Once on this page, you will enter the beneficiaries information for the individual accounts.

How long does it take for my rollover to be completed?

Generally, it takes 7-10 business days after the funds have left your old provider for the funds to appear into your Betterment account. This includes mail time, processing, and time for the funds to settle. You will be notified via email as soon as the funds appear in your Betterment account.

We suggest reaching out to your provider to confirm the date of liquidation.

If you still have questions regarding the status of your rollover, please email rollovers@betterment.com.

Where do I mail my rollover check?

If you receive a check for a rollover or transfer made out to “Betterment”, you can mail the check to one of the two addresses:

Regular Address:

Betterment

P.O Box 203945

Dallas, TX 75320

Overnight Address:

Wells Fargo Lockbox

Betterment

2975 Regent Blvd #203945

Irving, TX 75063

Please note that you should never mail checks to us if they are made out to your name directly, as we cannot accept checks made out to you.

What is a medallion signature guarantee?

A medallion signature guarantee is an extra level of security to prevent the unauthorized transfer of your assets. You can obtain a one at a local financial institution with which you have an account.  You will need to bring a statement from your current IRA provider to obtain a medallion signature guarantee.

You can read more about medallion signature guarantees here.

Who is Sunwest Trust?

Betterment uses Sunwest Trust as our IRA administrator and custodian for our IRA accounts. When it comes to an IRA, there are two types of “custodians” playing complimentary roles in ensuring the proper administration and effective management of your account.

An IRA is essentially a trust account – an account set aside for a beneficiary (you) for a later time – that receives tax-advantaged benefits in exchange for complying with contribution and distribution restrictions. As such, there is a necessity to ensure the IRA account is administered properly with regards to IRS requirements, which is why we use Sunwest Trust as our IRA administrator custodian. The funds themselves are held and managed by Betterment, who is the broker-dealer custodian.

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