Many of you are familiar with an IRA transfer where you “transfer” assets from one IRA to another IRA. IRA transfers can be executed at will by the IRA owner. But, what about 401(k) plans? Is there a transfer provision for 401(k) plans or just rollovers?
Yes, transfers can occur. But, let’s use two examples to explain what would be a rollover vs. what would be a transfer.
Rollover Example — Joe recently left a W-2 position and is now self-employed as owner of XYZ, Inc. He is the only owner and participant in the business and wants to establish a 401(k) for XYZ, Inc. He wishes to rollover funds from his participation in his previous employer’s (ABC Company) 401(k) plan into the new plan.
Is this a Rollover or a Transfer?
Well, you probably noticed that in the previous sentence the term “rollover” was used. As the funds would be rolled over from the ABC Company 401(k) Plan fbo Joe, this is considered a rollover as it is not “like-to-like”. It is going from one distinctly named plan to another, totally different, distintly named plan. Thus, a rollover.
Transfer Example — Let’s assume that Joe has already established his Solo 401(k) (referenced above, self-employed with no employees) for XYZ, Inc. and originally opened the 401(k) account as his local bank. However, since originally opening the account, he has come dissatisfied with his bank due to monthly service fees. Joe, while wanting to self-direct, may also want to invest some of the plan’s funds into mutual funds and does not have that option with the bank. For these reasons, he desperately wishes to open a 401(k) account elsewhere and simply “transfer” the plan’s funds held at the bank to the same-named account at a financial services company.
Is this a Rollover or Transfer?
Again, since I reference this as a “transfer example”, yes it is a transfer. Joe is not creating a new plan, he is just moving his current plan account to another company. If it helps with the visual, he is simply creating a different “housing” account for his 401(k) from the bank to the financial services company.
The primary emphasis is simply that a 401(k) account, once established and held at one company, can be transferred to another institution. The plan may not want monthly services fees, it may have found less expensive trading commission fees (for those that are investing some of their funds in traditional assets)…it doesn’t matter the reason. The plan can transfer the account if it so chooses. And, assuming the funds in the plan are, at the time, in all cash….this is a very simple transactions (oh, by the way, even if some of the assets are not in cash but in non-traditional assets, it is still not an issue).
As always, the information provided is intended to be educational in nature. It is not intended, nor should it be interpreted as, any form of tax, legal, financial or investment advice. Once must always consult with their respective professional in all such matters.