A Simple Primer on 401K Rollovers

Smart people know to begin with the end in mind, so you should always have your retirement plans as part of your financial considerations. However, what do you do when you’re ready to change jobs or closing in on retirement? Find out how to use 401K rollovers.

What Are 401K Rollovers?

A simple withdrawal from a 401K before retirement age incurs stiff tax penalties. A rollover takes your money from your 401K and transfers it to another tax-advantaged account.

You could roll your balance into another 401K as one option. Many others opt to put the funds into an individual retirement account.

You have a time limit on moving funds. After the disbursement of your 401K funds, you only have 60 days to put the money into another retirement plan. A direct rollover is usually the ideal way to make the transfer.

What Are Your Options for 401K Rollovers?

When you leave a job, you may be able to keep your 401K in the same account. This option depends on if your ex-employer allows you to do so. A plan with reasonable fees and excellent investment choices may make this a good idea.

However, you should be aware that you have limited options with your account going forward. The plan may begin to charge you higher fees. In general, you cannot continue contributing to the account or get assistance from the plan administrator.

You might choose to roll your money over to your new employer’s 401K. If the plans allow it and you roll the money directly from one account to another, you can avoid early distribution fees that cashing out incur.

A popular option is to do a 401K rollover to an IRA. You may have more freedom in your investment choices, and you might be able to get lower fees.

What Are Considerations for Traditional and Roth IRAs?

If you roll funds to an IRA, you must decide between a traditional or Roth account. The traditional IRA defers taxes until you retire, which can be wise if your income will be in a lower tax bracket at that point. A Roth IRA uses after-tax dollars, so you don’t pay taxes on retirement payouts.

A rollover from a Roth 401K to a Roth IRA has no tax implications because both plans use after-tax dollars. However, a rollover from a traditional 401K to a Roth IRA requires you to pay taxes on the amount you transfer.

Each option for a 401K rollover has advantages and potential drawbacks. The best way to decide what to do is to consult with a planner who can review your circumstances to help you plan for a solid financial future.