Years ago, you chose to contribute regularly and faithfully to your company’s 401k plan. This was a wise choice, since early and consistent financial planning is one of the keys to a successful retirement. But now you’re changing employers, or you’ve decided to change your planning strategy, and you need to roll over your 401k …. What do you do next?
A plan participant leaving an employer typically has four options (and may engage in a combination of these options), each choice offering advantages and disadvantages.
• Leave the money in his/her former employer’s plan, if permitted;
• Roll over the assets to his/her new employer’s plan, if one is available and rollovers are permitted;
• Roll over to an IRA; or
• Cash out the account value.
First, seek experienced guidance. A 401k rollover can be a smart, or simply necessary, decision. But because this maneuver is fraught with complicated rules, we want to be sure that you’re managing the rollover correctly. So give us a call if you’re considering this strategy.
Also, remember that a rollover is not available in all situations. Some plans won’t allow you to conduct a rollover unless you’ve left the company or retired. So, don’t get ahead of yourself. Let’s check on your plan’s policy before making any assumptions.
Next, keep the rules (and possible consequences) in mind. You must roll those funds into another qualified account within 60 days, or else you will owe income taxes on the entire amount withdrawn. On top of those taxes, you will also be charged a 10 percent penalty for withdrawing the money early (unless you’ve reached age 59 ½).
If you’re considering this rollover because you’ve switched employers, keep in mind that you have options. You can roll the funds into your new employer’s 401k, which might operate very similarly to your former plan. The tax structure would be the same, allowing you to make contributions on a pre-tax basis each year (but you’ll pay taxes on the withdrawals when you retire and begin taking them).
The other option is to roll the funds into a Roth IRA. From now on, your contributions will be made on an after-tax basis, but you won’t owe income taxes in retirement. This might be a good plan if you expect to move up an income tax bracket in retirement, but we should compare both scenarios before you make a final decision.
On that note, give us a call if you’re facing this dilemma. We can help you analyze each of your choices, and conduct the rollover safely.