Beyond making regular contributions and reviewing investment statements, you might not spend much time thinking about your 401(k). If you’re switching jobs, rolling over your retirement account should be top of mind.
A 401(k) rollover involves transferring the balance of your current employer-sponsored plan into a new retirement account. The process isn’t complicated, but there are several important things to remember.
A Rollover Is Not Mandatory
You’re not required to roll over your 401(k) when you switch jobs. If the account balance is more than $5,000, your investments can remain in their current account (if the balance is lower, it’s legal for your employer to force you out of the plan). Even though the account doesn’t have to be rolled over, you won’t be able to continue contributing to the employer-sponsored plan once you leave your job.
Decide Where to Transfer the Funds
Transferring the balance from one 401(k) to another is just one option. You can also rollover your 401(k) to a Roth IRA or traditional IRA. Always ask for a “direct rollover” to ensure the plan sends a check to the new investment account, not to you.
Doing a rollover from your current 401(k) account into a new retirement investment account is as simple as filling out the proper paperwork (ask your financial adviser or the benefits administrator at your new workplace for instructions). Your investments remain tax-deferred and opening a new 401(k) ensures that your retirement savings are in a single account, not spread out across multiple accounts.
Rolling a 401(k) into an IRA is also an option. Both traditional and Roth IRAs offer a wider variety of investment options than a 401(k) — and fees might be lower. Choose a traditional IRA to keep the investments tax-deferred. You’ll trigger taxes for transferring funds into a Roth IRA because the rollover is considered a Roth conversion. The funds in a Roth IRA grow tax-free and will not be taxed upon withdrawal — as long as you wait until at least age 59 1/2 to tap the into the account.
Once you decide whether to transfer the funds into a 401(k) or IRA, gather some information about your current accounts before making the move. You’ll need the current account balance, details of the types of mutual funds in the account, and statements to review the performance of your investments. These details will help you compare offerings between accounts and decide whether to move funds from one fund to a similar one or choose new asset classes for your investments.
Reconsider Cashing out
It might be tempting to cash out and use the balance from your 401(k) to pay down debt or tackle other expenses, but it’s almost always ill-advised. You’ll pay hefty taxes and penalties on withdrawals and you might be putting future retirement at risk by spending those funds today. There is an exception: If you leave your job between the ages of 55 and 59 1/2, it might be possible to access the balance without penalties. Explore the implications before cashing out.
Advice is Available
Navigating rollover options solo might feel overwhelming. Consult with your benefits administrator, financial adviser or tax preparer to weigh the options before making a decision. When it comes to a 401(k) rollover, an informed decision is better than a rushed decision.
Ensuring you’re on track for retirement should be a priority. Our agents can help you make sense of your retirement funding options, so when the time comes you can retire on your own terms.