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How to Rollover 401(k) Retirement Plans: 4 Steps to Take and 6 Things to Consider

How to rollover 401(k) retirement plans

Life often takes us down new paths, whether it’s a career change, retirement, or moving to a new city. Each of these milestones brings with it important financial decisions, including what to do with your 401(k).

Rolling over your 401(k) is a common option, but it’s essential to understand the process of how to rollover 401(k) retirement plans and the factors to consider before making a move.

What is a 401(k) Rollover?

A 401(k) rollover is the process of transferring funds from an existing 401(k) retirement account into another retirement account, such as an IRA or a new employer’s 401(k) plan. This transfer maintains the tax-deferred status of the funds, allowing them to continue growing without immediate tax consequences.

Rollovers can be done directly, where the funds move between accounts without the account holder handling the money, or indirectly, where the account holder temporarily receives the funds before transferring them to the new account.

How to Rollover 401(k) Retirement Plans in 4 Steps

  1. Choose the Type of Account: Decide whether to roll your 401(k) into an IRA or your new employer’s 401(k) plan. IRAs often provide more investment choices, while a new 401(k) might offer simplicity if you prefer to keep all your retirement funds in one place.
  2. Open the New Account: If you’re rolling over to an IRA, you’ll need to open an account. Most financial institutions allow you to do this online or with the help of a financial advisor.
  3. Initiate the Rollover: Contact your previous 401(k) plan administrator to initiate the rollover. They will provide specific instructions on how to transfer the funds. Be sure to request a direct rollover, where the funds are transferred directly to the new account, avoiding potential tax penalties.
  4. Invest Your Funds: Once the rollover is complete, you’ll need to decide how to invest the funds. Consider your overall retirement strategy and risk tolerance when choosing your investments.

6 Things to Consider When Rolling Over a 401(k)

1. Tax Implications

Rolling over a 401(k) can have tax implications, especially if not done correctly. A direct rollover avoids immediate taxes and penalties, while an indirect rollover (where you receive the funds and then deposit them into a new account) can result in withholding taxes and potential penalties if not completed within 60 days.

2. Fees and Expenses

Different retirement accounts have varying fee structures. Compare the fees associated with your new account versus your old 401(k) to see if you’re paying more than necessary.

3. Investment Options

Evaluate the investment options available in your new account. IRAs typically offer a broader range of investments compared to 401(k) plans. If you’re rolling into a new 401(k), review the plan’s investment options so they best align with your retirement goals.

4. Required Minimum Distributions (RMDs)

Understand the rules around required minimum distributions if you’re nearing retirement age. Different accounts have different RMD rules, which could affect your retirement strategy.

5. Beneficiary Designations

Confirm your beneficiary designations are up to date. This is a critical step to help your retirement funds distribute according to your wishes.

6. Financial Advice

Consider seeking advice from a financial advisor. Navigating a 401(k) rollover can be complex, and professional guidance can help you make informed decisions that align with your retirement goals.

Lump-Sum Distributions: What You Need to Know

Using a Portion of My Distribution

You may believe using this sum of money for debts would be the best way to use the money. However, this can really hurt your retirement. Depending on your situation, withdrawals may be subject to 10% penalties and taxes. Unfortunately, I have seen people take lump sum money from their retirement plan, pay 20%+ on taxes to pay down a 3% mortgage.

Be very careful before taking lump sums out to pay off certain debts. The best way to see what is right is to have a customized retirement plan. You can run your actual scenario to see what the best option is for you. A good plan takes into consideration taxes, age, spending habits, longevity, and healthcare costs, just to name a few.

I Was Offered a Lump-Sum Distribution When Leaving My Job. What Now?

A simple option would be to not take the lump-sum distribution just yet. Usually, you will have time to decide which of the many options may be best for you. I have seen people offered lump sum, annuity (income payouts) over their lifetime or joint lifetime, and other options.

What you may be offered can vary. Which options to take depends on where you are financially, what you want to accomplish both near and long term, and what specific options are available for you in that plan.

In some rare cases, they mail the check to you. If this happens, do not deposit it. Instead, forward it to your new custodian that has your IRA or 401(k). Some companies require you to fill out paperwork. As always, make sure you check with your financial advisor.

What if I Need the Sum of Money? Is There a Way to Prevent the 10% Early Distribution Penalty?

If you are over 55 years old and no longer with the company, you may be able to avoid the 10% early distribution penalty fee. If you roll that 401(k) into an IRA, you may lose this option. Where to take money from is one of the biggest decisions; a financial advisor can help you with this.

Another option is a 72(t) distribution. Under Internal Revenue Code Section 72(t), your payments will not be subject to a 10% early withdrawal penalty if you take your money out in “substantially equal payments” based on life expectancy tables. The IRS has approved three different calculation methods, which result in varying levels of payments.

However, except under limited circumstances, a tax penalty will apply if you change the amount or stop payments before the greater of five years or the amount of time before you turn age 59½. In other words, you must continue the payments for the longer of the two periods.

The Cost of Taking Money Out Now

As mentioned in using your money for expenses any money you take out can come with a hefty price, especially on your taxes. This chart from MFS Fund Distributors is a, “cost breakdown of distribution options an annual growth rate of 6%”.

Taking money now Directly rolling over distribution
Distribution $20,000 $20,000
20% withholding tax ($4,000) $0
10% early withdraw penalty ($2,000) $0
2% additional current tax owed ($400) $0
Available for reinvestment $13,600 $20,000
Net value in 10 years* $22,365 $24,356
Net value in 20 years* $36,778 $43,617
Net value in 30 years* $60,481 $89,598

Conclusion

Rolling over your 401(k) is an important financial decision that can have significant implications for your retirement. Understanding the process and considering the various factors involved can help you make the best choice for your future.

Key Takeaways

  • Evaluate Your Options: Choose between rolling over to an IRA or a new employer’s 401(k) based on your needs.
  • Understand Tax Implications: Direct rollovers avoid immediate taxes and penalties.
  • Consider Fees and Investment Choices: Compare fees and investment options between your old plan and the new one.
  • Plan for Required Minimum Distributions: Know the RMD rules for different accounts.
  • Keep Beneficiary Designations Updated: Plan ahead so your retirement funds are distributed according to your wishes.
  • Seek Professional Advice: A financial advisor can help navigate the complexities of a 401(k) rollover.

Ready to take the next step in your financial future? Book a free 15-minute financial assessment with Riverbend Wealth Management today and let us help you make informed decisions for a prosperous retirement.


Frequently Asked Questions

What does rolling over a 401(k) mean?

Rolling over a 401(k) means transferring your retirement savings from one 401(k) plan to another retirement account, such as an IRA or a new employer’s 401(k) plan, to maintain tax-deferred status.

What are the disadvantages of rolling over a 401(k) to an IRA?

Rolling over a 401(k) to an IRA can lead to higher fees, fewer creditor protections, and the loss of the ability to take penalty-free withdrawals if you retire early (between ages 55-59½).

What are the advantages of rolling over a 401(k) to an IRA?

Rolling over a 401(k) to an IRA offers more investment options, potential lower fees, consolidation of retirement accounts, and continued tax-deferred growth.

Do I have to pay taxes when rolling over a 401(k) to another 401(k)?

No, rolling over a 401(k) to another 401(k) is tax-free if done directly.


“Investment advice offered through Stratos Wealth Advisors, LLC, a registered investment advisor; DBA Riverbend Wealth Management. Investing involves substantial risk. Riverbend Wealth Management and Stratos Wealth Advisors do not make any guarantee or other promise as to any results that may be obtained from the webinar. While past performance may be analyzed, past performance should not be considered indicative of future performance. All indices are unmanaged and cannot be invested into directly. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that the strategies promoted will be successful. No listener should make any investment decision without first consulting his or her own personal financial advisor and conducting his or her own research and due diligence. Stratos Wealth Advisors and its affiliates do not provide tax, legal, or accounting advice. This material is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your own tax, legal, or accounting advisors before engaging in any transaction.”

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