5 Rollover Strategies for Your 401(k)

5 Rollover Strategies for Your 401(k)

The Bureau of Labor Statistics found that the average person will hold about 12 jobs over the course of their career (12.5 for men and 12.1 for women). This is a good thing. In fact, the longest you should stay at a job (if your goal is to keep increasing your income) is about two years. Employees who stay with a company longer than two years are estimated to make 50% less over their careers than their job-hopping counterparts. 

When you have several employers in your past, you may also have multiple 401(k)s. This isn’t ideal; as the more accounts you have scattered around, the harder it is to manage your money. So, let’s take a look at five rollover strategies for your 401(k).

Cash It Out

While you can liquidate an old 401(k) and take the money as a lump-sum distribution, it’s the worst option when leaving a job. It reduces the amount of money you have saved for your retirement and you will be taxed on the entire amount. If you’re not yet 591/2 or older, you will most likely be hit with a 10% penalty for early withdrawal. Your distribution may also be subject to state and federal taxes. In addition, you may also owe a mandatory 20% federal withholding tax. 

Leave It Where It Is

If your 401(k) account balance is above $5,000, most plans allow your money to stay put when you leave your job. If the money is under $1,000, the company can force you to liquidate it by issuing a check. If the balance is between $1,000 and $5,000 the company is required to help you set up an IRA for the money (if they are forcing you out). 

Leaving a job is a good opportunity to leave a plan that has few options or high fees. It also eliminates the need to manage multiple accounts. Another issue could arise if you pass away. Your beneficiaries will have to file a death-benefit claim with your retirement contract custodians. When you have multiple accounts, they might not know about the 401(k)s left with former employers. Even if they do, tracking them down will be burdensome. 

Take It With You

Ask your new employer if they offer a 401(k) and how long you must be employed there to participate. Often, employers require new employees to work for a certain period of time before they can enroll in a retirement savings plan. 

Once you can enroll in the new plan, it’s easy to roll over your old 401(k). You elect to have the old plan’s administrator deposit the balance of your previous account  into the new plan; simply by filling out paperwork. This is known as a direct transfer, made from one custodian to the next. It could prevent you from owing any taxes or missing a deadline. 

The other option is to have the balance of your old account distributed to you in the form of a check. However, you must deposit those funds into the new 401(k) within 60 days to avoid income taxes on the whole balance. Be sure your new 410(k) is active and ready to receive contributions before having the old account liquidated. 

Roll It Into an IRA

If you’re not switching jobs, your new employer doesn’t offer a 401(k), or available plans have bad offerings- you can roll your old 401(k) into an IRA. You can open the IRA on your own at whatever financial institution you choose. Your options are no longer limited to what your employer offers; so the choices are almost limitless. You can invest in whatever you want, wherever you want. You can use your IRA to buy stocks, bonds, real estate, gold, international stocks and more. 

The money in your IRA will grow tax-deferred until you start making withdrawals. As long as you wait until you’re at least age 59 ½, you won’t pay the 10% early withdrawal fee. You are, however, required to withdrawal before age 70 ½. 

One consideration is protection from creditors. If you’re in debt, the money in a 401(k) could be better protected from creditors than the money in an IRA. IRA protections from creditors vary by state. Some states allow creditors to make claims against an IRA. A 401(k) is also protected against the company’s creditors if the company were to go bankrupt. 

Take Distributions

You are able to take qualified distributions; but you must be at age 59 ½ to avoid the 10% early withdrawal penalty. If you are retiring, it might be a good time to start making withdrawals to pay your monthly expenses. 

If you have a traditional 401(k), you have to pay income tax at your ordinary rate on any distributions you take. If you have a designated Roth account, any distributions taken after age 59 ½ are tax-free (as long as you  had the account for at least five years). If you have not held the account for five years, only the earnings portion of your distributions will be subject to taxes. 

If you retire before age 55 or change jobs before  59 ½, you can still take distributions from your 401(k). However this would mean paying income tax on the taxable portion of your distribution. Careful, the whole distribution could be taxable and you may as be subject to an additional 10% early withdrawal penalty. The 10% penalty does not apply to those who retire after the age of 55 but before age 59 ½. 

Once you reach age 72, you must begin to take minimum distributions from your 401(k). The RMD amount is decided by your expected life span and account balance. 

What’s the Best Strategy?

The best strategy depends on your circumstances; so the answer will be different for everyone. We are happy to sit down with you to explain each option and reach a decision that makes the most sense for you, your family, and your retirement goals. 

In almost any circumstance, cashing out is the worst option. You’ll essentially be start from square one on your retirement investing. Time is extremely important so this can really make it difficult to play catch up. You’ll also be taxed; so depending on how much is in your 401(k), the amount could push you into a higher tax bracket. Finally, you will be subject to the 10% early withdrawal fee. You might see this as a punishment and it’s meant to be. The IRS uses this penalty to strongly discourage people from taking money out of their retirement accounts prematurely. Whatever you do, avoid this option.

We understand that these times are very confusing. Please reach out if you need a second opinion on your situation. Don’t let your hard-earned savings go to waste on penalties that may have been avoided. To learn more about the pros and cons of each option, please read this document.

Thanks for reading! Want to read more about our financial advice and opinions? See more of our blog article here


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. Please consult your tax, legal, and financial advisor for specific advice. 

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