A 401(k) rollover is when you transfer funds from your former employer-sponsored retirement plan into a new employer-sponsored retirement plan. Leaving your job is a significant life transition, so it makes sense that your employer-sponsored 401(k) may not be the first thing on your mind.
During company onboarding, you will likely adjust to your new job, handle administrative tasks, and absorb new information. It can be a stressful time. But you must think about 401(k) rollover options.
Below, we cover different options for the 401(k) rollover.
Why Roll Over Your Retirement Plan Distribution?
When you roll over a retirement plan distribution, you usually don’t pay tax until you remove it from the new plan. Rolling over allows you to save for your future while your money grows tax-deferred.
If you don’t roll over your payment, the distribution will be taxable and may be subject to additional tax unless you qualify for an exception to the 10% additional tax on early distributions.
Leave Assets in the Old Plan: A Retirement Fund Planning Strategy to Consider
Simply do nothing and, if allowed, leave your retirement funds with your previous employer. Leave your retirement funds with your previous one in this account if allowed. And since you’re no longer an employee, plan management or administration fees and transaction fees may apply now. Speak with your previous employer or the plan administrator for additional information about your retirement fund planning options.
Cash-out Your Assets.
An early distribution is when you withdraw funds from your retirement plan before age 59 ½. This means that, in addition to being subject to income taxes, your distribution may be subject to a 10% early withdrawal penalty tax, so it is advised to cash out before 59 ½.
Additionally, a mandatory 20% federal income tax withholding will apply to you, and depending on where you live, state income tax withholding may also be applicable.
Rollover to Your New Employer’s Plan.
You may be able to transfer assets from your previous employer’s qualified retirement plan to your current employer’s qualified retirement plan. Potential benefits include the possibility of lower fees and costs. You can generally continue to contribute.
And depending on the new plan, you can borrow against your retirement plan’s accumulated assets. For your information, you may have a waiting period before you can begin making contributions to your new plan.
Cashing Out Your 401(k) Account Rollover
Cashing out your 401K account rollover is typically a mistake. First, you will be taxed as regular income at your existing tax rate. In addition, if you decide to stop working, you must be at least 55 to avoid paying a 10% penalty. If you’re still working, you must be at least 59½.
So, try to avoid this option except in true emergencies. If you’re facing financial difficulties, such as being laid off, it’s crucial to withdraw what you need.
Convert into a Roth IRA
Withdrawals are completely tax-free in retirement, provided you’re over 59½ years old and holding the account for five years or more. Roth IRAs are also exempt from Roth Minimum Distributions (RMDs).
Because Roth IRAs are funded with after-tax dollars, you must pay taxes on your current 401(k) assets at the time of conversion. If you do not qualify for an exception, you may be subject to income tax on your earnings and a 10% early withdrawal penalty on the withdrawal amount if you take money out before you turn 59½.
