401(k) Rollover

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?

What Is a 401(k) Rollover?

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.

401(k) Rollover Considerations

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.

Pros

Pro: Ease of management. If you've switched employers many times during your career, you may have ended up with multiple plans. At this stage, it's difficult to manage them all and keep on top of what fees you're paying or returns you're getting. Rolling them all over into one easy-to-manage plan could be a good option.
Pro: Employer Matches Contributions. Some employers offer to match your 401(k) contributions and this might even apply immediately on joining. Rolling contributions from old plans may get you extra contributions from your new employer. Bear in mind that there will usually be limits to this.

Cons

Con: Limiting your Investment Options. A diversified investment portfolio can reduce financial risks or potentially get higher returns. You may choose to retain separate plans with different investment strategies at a range of risk factors.
Con: Control. Once you have rolled over into a new 401(k), it's usually under the control of an administrator or your employer. If you want a more hands-on approach to your investment, this can be a drawback.
Con: Higher fees. when moving your investments, you may be charged additional fees or find that the admin fees on the new plan are higher. This is something you should research or get professional advice on.

Frequently Asked Questions

When can you rollover a 401k?

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.

What happens if you don't rollover your 401k?

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.

Why should I rollover 401k to Roth IRA?

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.

What are the tax implications of a 401(k) rollover?

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.

Get Advice on Your 401(k)

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.

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