• Michael DiBartolomeo

Retirement Planning: Your Guide to a 401k Rollover

Whether you just switched jobs or you're getting serious about your retirement planning, a 401k rollover may be an option to improve your retirement finances.


Moving your retirement funds can seem intimidating and confusing, but a 401k rollover is a relatively easy process. It can come with costly mistakes, though, if you don't fully understand your choices and obligations.


The IRS governs retirement accounts, including penalties for early withdrawal and taxation on contribution amounts. Following the established guidelines helps you keep as much of your 401k money as possible during the transfer process.


Read this guide for 401k rollovers to understand the consequences of the move and to make the best possible decisions to avoid a retirement investment blunder.


What Is a 401k Rollover?

A 401k account is a tax-advantaged retirement plan that your employer sponsors. It's based on investments, and your employer makes the decisions on how the account is run. Many employers offer a contribution match, which helps your retirement funds grow.


A 401k rollover simply means you're moving the money you've put into your 401k to a different tax-advantaged retirement plan. You get to decide whether you move the money and the type of new plan you choose.


That means you actually have several more years than you think to finish out the college savings fund. You can continue contributing to college savings plans or other savings options while your child is in college. This shift in your savings deadline can help you spread out the contributions a little more to better fit your budget.


Reasons to Roll Over Your 401k

One of the most common reasons for a 401k rollover is switching jobs. Once you leave your old job, you can't keep contributing to that retirement account since it's sponsored by your former employer.


You may be responsible for paying more of the administration fees for that account once you no longer work for the company. That can eat up a lot of your retirement savings.


People who change jobs frequently may leave behind a trail of 401k accounts with different businesses. It's difficult to keep track of those different accounts. Rolling over the balances into one new retirement account simplifies the tracking of your funds for better retirement management.


You may not have a choice in rolling over your 401k if you have a small amount in the account. Employers can automatically cash out your 401k if you have a balance under $1,000. If you don't put that money into a new retirement account, you'll face the early withdrawal penalties and taxes.


A plan participant leaving an employer typically has four options (and may engage in a combination of these options), each choice offering advantages and disadvantages. These options include: Leaving the money in his/her former employer’s plan, if permitted; Rolling over the assets to his/her new employer’s plan, if one is available and rollovers are permitted; Rolling over to an IRA; or Cashing out the account value.


Reasons to Keep Your 401k Where It Is

Moving your money isn't always the best financial decision. If your previous employer was a major company, it may have much lower administration fees and better investment options than you'll find on other retirement accounts. It may be the most cost-effective option to keep the 401k where it is, even if you stop contributing to it.


You may also keep the 401k where it's at if part of the balance includes stocks from your previous employer. You may not be able to roll those stocks over into the new 401k depending on the investment options.



Rolling Over to Another 401k

If you're switching jobs, you can move your old 401k money into your new employer's 401k program. This combines all retirement funds into one account for easier management. It's a good option if you think you'll stay with your new employer for a long time.


Check out the investment options and fees associated with your new 401k account. Compare it to the fees and investments in your old plan. If the old options are better, you may want to keep the money there.


Rolling Over to an IRA

The other primary option is rolling over into an IRA (individual retirement account). This is a personal retirement account not linked to your employer.


It gives you full control over your retirement funds, including which financial institute you use to hold your money. This allows you to shop around to find options with the lowest fees.

You can choose between a traditional IRA and a Roth IRA. Traditional IRAs use pre-tax income with taxes deferred until withdrawal. This can be beneficial because you'll have a lower adjusted gross income with more deduction and credit options on your taxes after you retire.


With a Roth IRA, you pay taxes on the money at the time of contribution instead of when it's distributed. That means you'll pay taxes on the amount of the 401k rollover, but you won't have to pay taxes when you retire and take distributions.


Roth IRAs have a maximum income amount to qualify. As of 2019, you can't contribute to a Roth IRA if you're single and have a modified adjusted gross income over $137,000 or are married and have a modified AGI over $203,000. If you're close to those limits, your maximum contribution may be reduced.


60 Day Time Limit

Once you receive the disbursement for your rollover, you only have 60 days to get the money into your new account. If you don't, you'll face IRS penalties based on the amount of the distribution. The IRS sees it as you cashing out the 401k instead of rolling it over if you don't get the money in a new account within the 60-day timeframe.


Direct vs Indirect Rollovers

Direct 401k rollovers mean the holder of your old 401k sends the money directly to your new retirement account holder. This is the easiest and cheapest option because the financial institutes handle the work for you. You don't have to worry about the 60-day time limit because the transaction happens between the financial institutes.


An indirect rollover happens when your old administrator cuts you a check for the 401k balance and you deliver it into your new account. When you choose this option, the old administrator withholds 20% of your account balance to cover taxes should you not deposit it into a new retirement account. You're still required to deposit the full amount into the new account, though, so you'll have to come up with that 20% on your own.


Plan Your 401k Rollover

A 401k rollover can be the best option for keeping your retirement money in one place. It's also beneficial if your rollover options offer better tax advantages or lower fees. Understanding how the rollover works can help you make the best decision for your retirement accounts.


If you're not sure what to do your 401k, contact us to set up an appointment. We can help you analyze your situation and decide where your retirement money should go.


*Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

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The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. Some of this material was developed and produced by Phase Marketing LLC to provide information on a topic that may be of interest. Phase Marketing LLC is not affiliated with the named representative, broker - dealer, state - or SEC - registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.

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