Should You Roll Over Your 401(k)? Important Things to Consider While You Rollover

Should You Roll Over Your 401(k)? Important Things to Consider While You Rollover

Gone are the days when someone joins a company, grows their career with the same employer and then finally takes a retirement after 50 years. In the 21st century, changing jobs frequently has become a typical scenario with most employees.

Though changing jobs can be exciting, but amid career transitions, you must not forget to rollover your 401(k) plan that is with your former employer. It is essential to figure out various options to roll over your 401(k), but it might cost you too much if you don’t make the right decision. Therefore, before you decide on any option you should be aware of the following factors that can influence your decision:

  • Will there be any tax implications on my rollover?

  • Will I get investment options?

  • Will I have the flexibility to manage my money?

  • Can I save on annual fees?

Outlined below are five options to consider when you are leaving a company where you have a 401(k).

5 key points to consider for a 401(k) rollover

  1. Continue with the 401(k) plan with your former employer.
  2. Rollover to New Employer’s 401(k).
  3. Rollover money to a traditional IRA
  4. Roll over to a Roth IRA
  5. Take cash distribution
  1. Continue with the 401(k) plan with your former employer

    If your employer permits, you can consider leaving your consolidated funds with previous employer’s 401(k) plan where the funds will continue to have potential tax-deferred growth. You may not always have this opportunity however if allowed, leaving your money in your old employer’s 401(k) temporarily can be a good idea because this will enable you to explore other investment options.

    With this option, you still can continue to invest the money in the funds; however, you will not be contributing anything further towards the plan. Remember this option may not be available for 401k accounts with balances of less than $1,000. You will have access to loans, various investment tools, distribution options, and other services but your ability to transfer assets and withdrawal options may be limited.

  2. Rollover to New Employer’s 401(k)

    Moving your retirement saving plan to your new employer can be another option that is available when you are starting a new job. This option lets you consolidate all your 401(k) into a single account which will make it easier for you to manage, monitor and track the funds’ performance.

    Before you plan to roll over your 401(k), it is essential to consider a few things like the fee structure – you may need to check if your new employer’s expenses are higher than your former employer’s 401(k) or an IRA, and rolling over company stock may have some negative tax implications.

    There are two ways to roll over 401(k) to a new employer’s plan: –
    • Direct rollover: This option lets you to directly move your 401(k) to your new employer by selecting the right investments before you complete the process of rollover. Once you fill in the required details in the form, your former plan administrator will transfer the account value directly to the new plan.

    • Indirect rollover: You need to withdraw the money from the 401(k) account and deposit it to your new employer’s plan yourself. In this option, your employer by law is required to withhold 20 percent of the potentially taxable amount that you plan to roll over. But in case you require a short-term loan or need funds for an extreme emergency in between switching jobs then you can choose to indirectly rollover your 401(k) plan. Remember, you may have to face early withdrawal penalties unless you repay the loan amount within 60 days. Hence you should ensure that you use these funds as a last resort only.

  3. Rollover money to a traditional IRA

    If you are changing jobs or retiring then rolling over your 401(k) to a traditional IRA can be beneficial. Simply, because IRA gives you the flexibility to manage your savings with ease and provide access to at least dozens of investment options while also continuing tax-deferred growth potential. If you already have an existing IRA, then you will be able to consolidate all your money in one place. Along with various investment options, you will also be offered ready-made portfolios and free retirement planning tools by the broker.

    Rolling over your 401k to an IRA may seem simple, but it isn’t. The downside of this rollover can become a burden on you as it requires a lot of learning of investment options and understanding on your part than investing in an employer’s plan.

  4. Roll over to a Roth IRA

    Rolling over your 401(k) plan to a Roth IRA can be another option when you are switching jobs. This option will let you save for retirement while allowing your money and other additional contributions to grow tax-free. You can directly rollover your traditional 401(k) plan to Roth IRA however you’ll owe tax on the untaxed money you withdraw from the 401(k) to put into the Roth IRA. You will have access to a variety of investment options which were not available in your former employer's 401(k), but at the same time, you are not required to take RMDs upon reaching age 70 ½.

  5. Take cash distribution

    You can withdraw the entire contribution that you have earned in your 401(k). Though this option may sound simple and easy, but you’ll most likely be attracting a whopping tax penalty hit on your entire amount plus a 10% early-withdrawal penalty, if you are younger than 55. Cashing out funds is never a good idea unless you have a dire financial situation. Remember that withdrawing your money from 401(k) may impact you, as you might not have enough money to take care of your post-retirement needs.

    If done correctly, these options will help you roll over from your employer’s plan without any hassle. However, it’s essential to evaluate each option carefully so that you can make the right decision for your specific needs.

    Still not sure what to do with your 401(k)? It is always a good idea to get help from a financial advisor who can weigh the advantages and disadvantages according to your goals and help you roll over your old 401(k) accordingly.