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When an employer provides you with the option for a 401(k) account it is beneficial to you since it allows you to invest money earned from working to help you prepare for financing your retirement. The best part is you will be able to grow your investment capital while also deducting your contributions from your income taxes, therefore lowering your tax liability. 

However, at some point you may change jobs or want to retire. This is when you will need to decide what to do with your 401(k) account. It may be best to rollover your 401(k) account in many cases. 

What is a 401(k) rollover? 

Moving funds from a 401(k) to another 401(k) account or some other type of tax-advantaged retirement account is referred to as a 401(k) rollover. The idea is to transfer the funds while still maintaining the tax-deferral benefits. Once you receive the funds from your 401(k) you will have 60 days to contribute the funds into another tax-advantaged retirement account. 

Four options for your old 401(k) 

There are four common options to choose from when making a decision on what to do with an old 401(k) account. You can rollover into an individual retirement account (IRA), a new employer’s 401(k), keep the former employer’s 401(k) or cash out the old 401(k). You should note cashing out the 401(k) may result in tax charges and penalties. 

Rolling over to an IRA 

It is common for people to choose to rollover a 401(k) into an IRA due to more investment options offered. Also, many times an IRA will charge you lower fees. 

If you’ve changed jobs or are retiring, rolling over your retirement assets to an IRA can be an excellent solution. It is a non-taxable event when done properly – and gives you access to a wide range of investments and the convenience of having consolidated your savings in a single location. In addition, flexible beneficiary designations may allow for the continued tax-deferred investing of inherited IRA assets. 

  • Pro: Likely more investment options, not a taxable event, consolidating accounts and locations
  • Con: usually fee involved, potential termination fees 

Other Options

In addition to rolling over your 401(k) to an IRA, there are other options. Here is a brief look at all your options. For additional information and what is suitable for your particular situation, please consult us. 

  • Leave money in your former employer’s plan, if permitted
    • Pro: You may like the investments offered in the plan and may not have a fee for leaving it in the plan. Not a taxable event.
  • Rollover the assets to your new employer’s plan if one is available and it is permitted
    • Pro: Keeping it all together with a larger sum of money working for you, not a taxable event
    • Con: Not all employer plans accept rollovers.
  • Cash out the account
    • Con: A taxable event, loss of investing potential. Costly for young individuals under 59 ½; there is a penalty of 10% in addition to income taxes. 

Indirect rollover 

Usually, people will do a direct rollover which means the funds from your old 401(k) account are transferred directly to your new retirement account. This makes the process simpler. However, some may opt for an indirect rollover which is when the funds from your old 401(k) are transferred to you at first and then later deposited into a new retirement account. 

Although this is perfectly legal and acceptable to do, you do have to pay attention to the 60-day roll-over rule which states you will have to make the deposit into the new retirement account within 60 days after receiving your distribution from the old 401(k). Failure to do so will result in increased tax liabilities and potentially early withdrawal fees. 

Planning for retirement 

Properly and strategically managing your 401(k) and other investment accounts is an essential part of a comprehensive retirement strategy. However, there are many other aspects to consider when planning for your golden years. Let a knowledgeable financial advisor on our team provide assistance in helping you make the right decisions in preparing for a comfortable retirement.