Retirement day arrives, and along with the handshakes and cake comes a letter from your plan administrator: What would you like to do with your 401(k)? This decision has far-reaching implications for your retirement, and it’s a common crossroads on the road to retirement.
Your Four Options
- Leave it in your former employer’s plan. This may be an option if the plan allows it, though you’ll have limited investment choices and less control.
- Roll it into a new employer’s plan. This keeps everything in one place if you’re still working and the plan accepts rollovers.
- Roll it into an IRA. This typically offers a wider range of investment choices.
- Cash it out. This is often the most expensive choice. You’ll owe income tax on the full amount, and if you’re under 59½, possibly a 10% early withdrawal penalty.
5 Things to Know Before You Decide
1. Understand direct vs. indirect rollovers. When money moves directly from one custodian to another, nothing is withheld. If a check is made out to you, the plan generally must withhold 20% for federal taxes, and you have 60 days to deposit the full amount into the IRA, including the 20% that was withheld, or the shortfall may be taxed.
2. Pre-tax and Roth are treated differently. Pre-tax dollars generally go to a traditional IRA and Roth 401(k) dollars to a Roth IRA. Mixing them up can create an unintended tax bill.
3. Compare fees and investment choices. Look at what you pay inside the plan versus what you’d pay in an IRA. Our Wealth Management services use an investment methodology called Market Guard®.
4. Check for special rules before you roll. Some situations, like the “Rule of 55” (penalty-free access to your current employer’s 401(k) if you leave in or after the year you turn 55) or appreciated company stock, may be affected if you roll over.
5. Think about income, not just growth. Where your money sits may affect how you turn it into a paycheck. See our post, Does Guaranteed Income Belong in Your Retirement Plan?
Consider Timing
Rollover decisions often happen right as retirement begins, when emotions can run high. Some of the issues in 5 Common Retirement Pitfalls Fort Wayne Retirees May Encounter in Year One relate to decisions made in a rush.
Our IRA/401(k) Rollover service can help you evaluate your options, including leaving the money where it is, rolling it over, or taking a distribution.
401(k) Rollover FAQs
Is rolling over a 401(k) to an IRA taxable?
A direct rollover between like accounts (pre-tax to traditional IRA) is generally not a taxable event.
How long do I have to decide?
Often there’s no deadline to leave money in your former employer’s plan, though some plans have balance minimums or restrictions. Check with your plan administrator.
Can I roll over while I’m still working?
Some plans allow “in-service” rollovers after a certain age. Plan rules vary, so ask your administrator.
What if I have several old 401(k)s?
Some people consolidate to see their retirement picture in one place. It isn’t the right choice in every case.
Do I need a financial professional to do a rollover?
No. Some people find it helpful to have the paperwork and options reviewed before they sign.
Not sure which option to consider? Contact Troyer Retirement to start a conversation.
This content is provided for informational purposes only. Troyer Retirement and its representatives do not provide tax or legal advice. Individuals should consult with a qualified professional regarding their personal situation before making financial decisions.
Investment advisory products and services made available through Impact Partnership Wealth, LLC (“IPW”), a Registered Investment Adviser. Troyer Retirement is not affiliated with or endorsed by the U.S. Government or any governmental agency. Please remember that converting an employer plan account to a Roth IRA is a taxable event. Increased taxable income from the Roth IRA conversion may have several consequences. Be sure to consult with a qualified tax advisor before making any decisions regarding your IRA. 6053356-10/26
