What is a 401(k) Rollover?

There are multiple situations when you have to move your money out of a 401(k) account. Maybe you’re changing jobs or want to try another type of retirement account. The process of moving money out of your 401(k) account is called a 401(k) rollover. You can rollover a 401(k) into an IRA account or another 401(k) account.

401(k) Rollover to a Traditional IRA Account

Rolling funds from a traditional 401(k) to a traditional IRA or a Roth 401(k) to Roth IRA is pretty straightforward. In most cases, your 401(k) provider can transfer the funds directly to the new IRA provider or send you a check you can deposit into your new IRA account.

It would help if you looked out for taxes and penalties any provider may preemptively deduct. Typically, you shouldn’t pay any penalties or taxes if you deposit the funds into a tax-advantaged account within 60 days.

401(k) Rollover to a Roth IRA Account

A 401(k) to Roth IRA rollover is beneficial for retirement savers and people with high incomes who might not be able to save to a Roth IRA. This process allows you to alter your retirement account’s tax treatment and avoid required minimum distributions (RMD).

However, there are likely to be tax consequences. Since traditional 401(k) are tax-deferred accounts, you’re likely to be still owing taxes on the funds being transferred to the IRA account (which holds pre-taxed contributions).

401(k) Rollover to Another 401(k) Account

You can rollover an old 401(k) employer account to a new one. This is a great option to consolidate all your retirement funds in one place and minimize maintenance fees.

Some Reasons to Consider A 401(K) Rollover

  • Consolidate your accounts: A 401(k) rollover allows you to consolidate all your retirement funds in a single place, especially when you change jobs.
  • Access more investment choices: Rolling over your 401(k) to other retirement investment types opens up more investment options that aren’t available with 401(k) accounts.
  • Get lower fees: Workplace 401(k) accounts typically come with high administrative fees. Rolling over your money can save you thousands of dollars in fees. Most 401(k) accounts charge up to 1% in annual fee per $100.

You Could be Required to Roll Over Your 401(k)

You might have no choice but to roll over your account if:

  • You don’t meet the minimum balance requirement. Your employer may require that you rollover to another account.
  • If your current or previous employer changes provider, you may have to roll over to another account.

Reasons to Avoid a 401(k) Rollover.

There are times when doing a 401(k) rollover doesn’t make sense.

  • IRAs offer less protection: If you declare bankruptcy later, you may find more protection with a 401(k) than an IRA account.
  • Higher fees: You could end up paying higher fees when you roll over an old 401(k) into a new one.
  • Limited investment choices: A new 401(k) account may have limited investment options. If that’s the case, you should probably stick to your current 401(k) account.
  • Access to the rule of 55: With a 401(k) account, you’ll be able to make penalty-free withdrawals before the age of 59 ½, if you leave your employer after you turn 55. This feature isn’t available to IRA accounts.

Considerations for a 401(k) Rollover

Fund Selection And Fees: Consider the fees of different brokerages and the available fund choices. When it comes to fund selection, you may turn to Robo-advisors that manage retirement funds. Otherwise, start with a simple portfolio of various U.S stock index funds, U.S bond funds, and international stock funds.

401(k) Fund Transfers

The best option is for your previous 401(k) provider to transfer the funds to your new 401(k) account. Some providers may, however, send you that money as a check. When this happens, you have up to 60 days to move the funds into a qualified account or face penalties.

It’s essential that you pay attention to potential withholdings. Even if you don’t owe taxes, some providers may withhold taxes on what they consider an early withdrawal.

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