You are leaving your job for a job with a new employer. Or you are retiring. What do you do with your retirement funds? You have four options to consider.
401(k) rollover to an IRA
Rolling over your 401(k) into an IRA has the benefits of more investment choices. There are three types of 401(k) rollovers you can do.
- A rollover from a traditional 401(k) to a traditional IRA. This option is tax free if done correctly. It allows your investment to continue to grow tax deferred. You are only taxed when you take direct distributions. You may also have more investment choices.
- A rollover from a traditional IRA to a Roth IRA. The amount you roll over to a Roth will be taxable because the money contributed to the 401(k) was pre-tax. However, the Roth will grow tax free and future distributions will be tax free.
- A rollover from a Roth 401(k) to a Roth IRA. You won’t incur taxes on this rollover because a Roth 401(k) and a Roth IRA are funded with after-tax dollars. Having a tax-free source of funds in retirement allows for strategic cash flow planning.
Keep your 401(k) with a former employer
Keep your 401(k) with a former employerDoes the employer have good investment options? What will be the administrative cost to maintain your account at your old employer?
401(k) and 403(b) retirement plans are under ERISA guidelines. This provides protection from creditors. Your account is also preserved in a bankruptcy filing – Federal Law applies. IRAs may have bankruptcy protection from state law. They do not have creditor protection.
If you leave employment at age 55 or later, you are able to take a disbursement from your 401(k). It is taxable income but not subject to the early distribution penalty of 10%. Penalty free distributions from an IRA begin at 59 1/2.
Roll your old 401(k) over to a new employer.
If the new employer allows it, you may transfer the assets from the old 401(k) to the new employer’s 401(k) plan. Evaluate the new plan’s investment options. Do you have good options?
Consolidating the old 401(k) with the new 401(k) can make it easier to keep track of your account.
Most 401(k) plans allow you to borrow against your account. You can’t take a loan from your IRA.
Lump sum distribution
You may take direct receipt of your retirement account. That may come at a high cost. It will be taxable and possibly subject to the 10% early distribution penalty. It is standard for plan administrators to withhold 20% Federal taxes unless other directions are provided.
As you leave your old employer, you have several options to consider. Our office is here to help.
Not making a decision is, in effect, choosing option #2.