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401(k) Rollover

401(k) Rollover

A 401(k) rollover is the transfer of funds from a 401(k) employer-sponsored plan to an individual retirement account (IRA) or to a new 401(k) plan. The IRS gives 60 days from the date that the funds are removed from the original 401(k) plan for the funds to be put into a new retirement savings vehicle, otherwise the owner incurs fees and/or penalties from the IRS. If you leave a job for any reason where you have an employer-sponsored 401(k), you must decide what to do with the money in the account. There are many options available, including completing a 401(k) rollover into your new employer’s plan, a bank rollover option, or a rollover into an individual retirement account (IRA). One of the most beneficial options in many cases is the IRA rollover.

IRA Rollover

There are many benefits to completing a 401(k) rollover to an IRA. These include having more diverse investment selections than the standard 401(k) plan has as well as potentially lower account fees. Many individual retirement accounts do not charge any account fees. A 401(k) rollover to IRA can be broken down into four essential steps, choose the type of IRA account to open, open the new IRA, ask for a direct 401(k) rollover to IRA or follow the IRS 60-day rule, and select your investments. A financial advisor is a valuable resource to help you decide where to allocate retirement savings funds and deciding which account would be most beneficial for your individual needs. A Roth IRA rollover is taxed upon completion. A traditional IRA rollover is tax-deferred. Except if you complete a rollover from a Roth 401(k) to a Roth IRA, additional taxes will not be assessed on those Roth funds.

Top Reasons to Complete a 401(k) Rollover to IRA

Leaving a job or switching employers are not the only reasons to complete a 401(k) rollover to IRA. In fact, there are multiple other reasons to complete a 401(k) rollover to IRA. Reasons can include having more investment choices, better communication, lower fees, and the ability to have a Roth account. Other benefits can include having cash incentives to open an IRA account, fewer rules, and having estate planning advantages. 401(k) plans tend to be limited to fewer investment choices such as certain mutual funds, but mostly equity funds, and a couple of bond funds. Yet with an IRA, most kinds of investments are available to you.

401(k) Rollover Rules

It can be difficult to sort through the many 401(k) rollover rules. They are based on your individual situation. The kind of 401(k) you had originally and which type of account you are going to roll it into can make a difference in whether you must pay taxes, fees, penalties, or other consequences. All of which is why it is so important to get a financial advisor to assist you with your 401(k) rollover. A financial advisor knows the ins and outs of all the 401(k) rollover rules and will help you avoid any unexpected tax obligations. Some things that you’ll need to keep in mind:

  • Traditional 401(k)s are funded with pre-tax income. You will owe taxes on these funds upon qualified withdrawal.
  • A Roth IRA is funded with after-tax dollars, so you must pay taxes upfront. Qualified withdrawals from a Roth IRA are then tax-free.
  • Immediate tax implications can be avoided by dispersing post-tax funds to a Roth IRA and pre-tax funds to a traditional IRA.
  • Each year, the IRS reviews the maximum contribution limits for 401(k) plans and other retirement savings accounts. Sometimes they decide to change these limits.
  • Individuals aged 50 or over may make “catch-up” contributions more than the regular annual limits.

Key Takeaways

The bottom line is that there are a few things you must think about when deciding whether a 401(k) rollover is right for you, including fees, the range/quality of investments in your 401(k) versus an IRA, and the rules of the 401(k). Remember that you must act as inaction can cause unnecessary fees. Thinking about rolling your 401(k) into an IRA? Or something similar? Make sure you review all of your options; we are here to help! Call today.