401k Rollover Options
Have you changed jobs or are you planning to retire?
The great thing about a 401k retirement savings plan is that most plans are portable when you leave a job.
So what should you do with your 401k?
The way your 401k plan works after you retire depends on what you do with it. You have several options, each with their own advantages and disadvantages. Review the chart below and consider your options carefully before making a decision. There are several factors to consider based on your personal circumstances and financial goals.
ROLLOVER TO AN IRA
Pros
- No taxes are due at the time of transfer into a Traditional IRA plan and your investments remain tax-deferred until you withdraw them
- You usually have access to a wider range of investment options
- You may have the option to convert to a Roth IRA for additional flexibility
- IRAs offer penalty-free withdrawals prior to 59½ in special circumstances (such as higher education expenses, health insurance premiums or a first-time home purchase)
Cons
- You will not be able to borrow money from your IRA account
- Required minimum distributions begin at age 72 regardless of if you are retired or not
- You may not have access to the exact same investments in an IRA that you had in your employer's 401k plan
- The level of protection from creditors for assets in an IRA is lower than in a plan
Keep in Mind
Any outstanding plan loan balances would need to be repaid prior to rolling over or you may incur income taxes and potentially a 10% tax penalty. Speak with our advisors about your options.
ROLLOVER TO NEW EMPLOYER 401k
Pros
- With a direct transfer you can transfer your entire account balance without taxes or penalties
- You may be able to take loans against your account
- You may be able to take penalty-free withdrawals if you leave your new employer between age 55 and 59
- Your retirement plan balances may be protected from creditors and legal judgements under federal law
- The investment choices on your plan menu were selected by a plan fiduciary
Cons
- Your investment choices are limited to those in the new employer's 401k plan
- You may have to pay certain plan administration or recordkeeping fees if the employer doesn't cover these
- You have to carefully follow the direct transfer requirements to have your assets moved over without incurring additional penalties and taxes
- If you hold appreciated employer stock in your former employer’s plan account, there could be tax consequences. You can speak with a tax advisor to find out your options.
Keep in Mind
If you don't follow the 401k transfer rules you could end up with extra penalties and taxes. Work with your new employer's plan administrator on how to transfer the funds from your old 401k into the new plan. Speak with one of our advisors about your options.
STAY IN EMPLOYER PLAN
Pros
- If you are happy with your current plan's investment options, you can remain in the plan and continue having access to those options
- Your investments will remain tax-deferred until you withdraw them
- You may be able to take loans against your account or take penalty-free withdrawals under certain circumstances
- Your retirement plan balances may be protected from creditors and legal judgements under federal law
- The investment choices on your plan menu were selected by a plan fiduciary
Cons
- Your investment choices would be limited to those in the plan
- You may have to pay certain plan administration or recordkeeping fees that your former employer passes through to you
- You are not able to contribute any new funds to the plan
- This becomes an additional account to manage if you don't consolidate your plans
Keep in Mind
If you have less than $5,000 in your account, you may be required to transfer your money out of that retirement plan, and if you have less than $1,000 in the account, your former employer will likely cut you a check for the appropriate amount. Speak with one of our advisors about your options.
CASH OUT THE ACCOUNT
Pros
- Your get your money immediately (after any taxes and applicable penalties)
Cons
- The amount that you cash out will be subject to mandatory 20% withholding for federal taxes if under age 59½
- Your distribution will be subject to applicable federal, state and local taxes
- You will be required to pay a 10% early withdrawal penalty on top of the taxes if you left your employer prior to the year you turned 55 and are younger than 59 ½
- The amount you cash out will be taxed as income
- Your retirement savings and the benefits along with your plan will be depleted
- It will take you longer to make up the savings and you will also lose the benefit of time.
Keep in Mind
The Coronavirus Aid, Relief and Economic Security Act, which allocates $2 trillion toward economic stimulus and relief in the wake of the coronavirus pandemic, includes several provisions that make it easier for those affected by the outbreak to access retirement funds. Speak with one of our advisors about your options.
SCHEDULE A REVIEW OF YOUR 401(K) PLAN ROLLOVER OPTIONS
Rules controlling what you can do with your 401(k) after retirement are very complicated, shaped both by the IRS and by the company that set up the plan. Capital Financial Solutions has the experience and a team of dedicated advisors that can guide you through your options.