Approaching retirement is in many ways similar to coming to the end of a long hike. You're hoping that you're well prepared for this final stretch and that it won't have too many unexpected obstacles as you've already put in a lot of effort. Of course, obstacles occur before this stage too. For example, most of us switch employers many times before retirement so what to do with the 401(k) you've built up when you leave an employer? Do you rollover into your new one, put it into an Individual Retirement Account (IRA) or leave it where it is?
Simply put, a rollover is when you direct your 401(k) funds to be transferred to an IRA or into a new retirement account. From the date an IRA or retirement plan distributes, the IRS rules give you sixty days to roll it over to an IRA or another plan and you may only do this once in any twelve-month period. However, there are exceptions to this for certain types of rollovers including plan-to-plan.
So you're considering your 401(k) rollover options. How to decide if it's a good idea or not. Here are a few pros and cons to help you decide.
You can rollover your 401(k) whenever you leave an employer or when you retire. However, many plans allow you to rollover while you are still employed. However, this is not always recommended and you should talk to a financial adviser before doing it.
If you don't rollover your 401(k) there are tax implications. These include 25% federal tax, 5% state tax and a 10% early withdrawal fee.
A Roth IRA has higher contribution limits so may make more sense for younger people who anticipate a long career with high earnings as it allows your investments to grow for a longer period. It's also easier to make early withdrawals with a Roth IRA and it offers more investment options.
A 401(k) rollover from one IRA to another is a non-taxable transaction, as long as it occurs within the sixty-day period allowed by the IRS. You won't pay any taxes on this money until you withdraw it permanently.
As you can see, 401(k) rollover options are a complicated business. As with starting out on a mountain trail, you should always scout the terrain ahead and be prepared. Often this can mean choosing a more experienced partner to guide you along. At Trailhead Financial Group, we are ready to be that partner. Contact us today to find out more about your 401(k) rollover options and more.