If you leave your job or retire, you may be wondering what your options are for a 401(k) rollover. Determining where you want to roll over your 401(k) is a crucial decision that can result in significant savings or costs. When you roll over your 401(k) with high-fee investments to your new employer’s 401(k) plan or a lower-cost investment option, you could enjoy major savings. Even the smallest decrease in fees could significantly increase your retirement account balance.
In this article, we cover all the basics to help you determine whether a 401(k) rollover is right for you.
What Is a 401(k) Rollover?
A rollover is a common way to transfer funds from one retirement account to another, such as between an individual retirement account (IRA) and a 401(k) plan. A rollover can be either a direct rollover or an indirect rollover.
- Direct rollover: Direct rollovers occur when you move funds from an employer-sponsored retirement plan to an IRA. The retirement plan administrator sends the funds in the retirement plan directly to the custodian of your IRA. With a direct rollover, there is no withholding or tax consequence.
- Indirect rollover: Indirect rollovers occur when money is transferred from a tax-deferred 401(k) plan to another retirement plan that is also tax-deferred. The employee receives the funds via check to deposit into a personal account. The owner must then deposit these funds into a new IRA.
A 401(k) rollover occurs when a retirement account holder directs the money in their 401(k) plan to be transferred to an IRA or a new 401(k) plan. When you roll over a 401(k), you typically don’t pay taxes on the distribution until you withdraw it from your new plan. By rolling over a 401(k), you can save for your future and ensure your money continues growing tax-deferred.
How Long Do You Have to Roll Over a 401(k)?
If you are leaving your job, you have a few options for your employer-sponsored 401(k) plan. You can choose to leave the plan alone, cash it out or roll it over. For many, a rollover is the best option. However, you may be limited in how much time you can take before you roll over your funds. The IRS allows you to take 60 days to roll over a 401(k) into another plan after you receive a retirement plan distribution.
In some circumstances, the IRS may waive this 60-day rollover requirement. If you do not qualify for a waiver and you do not roll over your 401(k) by the 60-day deadline, it may become taxable and you may need to pay additional tax on early distributions. For example, you may need to pay an early withdrawal penalty of a 10% additional tax if you are under age 59 ½.
When Can You Roll Over a 401(k)?
You can roll over a 401(k) when a triggering event occurs. Some common triggering events include leaving your job, reaching age 59 ½ or your retirement plan being terminated. When any of these triggering events occur, you gain access to the funds in your 401(k) plan.
You may also qualify for a hardship withdrawal if you have a qualifying hardship, such as significant medical bills or major financial needs. You may still have to pay taxes to the IRS in this situation, even if you aren’t required to pay an early distribution penalty.
Common 401(k) Rollover Mistakes
Before you learn how to roll over a 401(k), you may want to be aware of some of the mistakes that can be made during this process. Common 401(k) mistakes include:
- Cashing out a 401(k): One of the biggest rollover mistakes is taking out money from the 401(k) plan. Doing so will mean your money is subject to taxes and possibly penalties. Between paying taxes and losing retirement funds, you may veer off track with your retirement savings plan when you withdraw from your 401(k) early.
- Forgetting about a 401(k) plan: When leaving a job, some Americans simply forget they have a 401(k) plan with their former employer. If you accidentally abandon your 401(k), you could potentially lose significant retirement savings.
- Ignoring other investment options: Many employer-sponsored 401(k) plans are limited to certain investment types, such as stocks, mutual funds and bonds. Other retirement plans like self-directed IRAs allow you to invest in alternative assets as well, such as precious metals and real estate.
- Trying to roll over after-tax retirement funds: If you have after-tax retirement funds, you may not be able to roll these funds over into a 401(k) with your new employer. If this occurs, you may want to opt for rolling over your 401(k) funds into an IRA.
- Overlooking the tax consequences of a Roth conversion: Converting a pretax 401(k) plan into a Roth IRA could have tax implications. Be sure to understand the taxes you may owe if you opt for a Roth conversion.
How Does a 401(k) Rollover Work?
Below, we cover how to roll over a 401(k) with the following steps:
- Determine where you will roll over the funds: First, you should determine where you want your 401(k) rollover to go, such as another 401(k) or an IRA. To determine the right option for you, consider whether you want to invest your money yourself or have someone manage the plan for you, whether the new investment options offer attractive returns and whether you want guidance to help you invest.
- Open an account: Once you know where you want to roll over your 401(k), open an account. After you open an account, you can start the rollover process.
- Conduct the 401(k) rollover: Each financial institution and brokerage has its own process for rolling over a 401(k), so ask how you can initiate the process. Fill out the necessary paperwork to conduct the 401(k) rollover and act quickly to avoid missing the 60-day deadline.
Roll Over Your 401(k) to Accuplan Today
At Accuplan, we offer a self-directed 401(k) and 401(k) administration. A self-directed 401(k) is a retirement account that is specifically designed to support a business that solely employs the owner, spouse and business partners. Whether the business is a corporation, partnership, sole proprietorship or incorporated or unincorporated business, a self-directed 401(k) may be the right option. Our 401(k) administration services allow us to set up and manage your 401(k) to keep your plan compliant with all the relevant laws at the federal and state level.
We pride ourselves on being a leading provider of self-directed IRA administration and playing an integral role in the success of investors. Fill out an application to roll over a 401(k) to Accuplan today.
*Our information should not be relied on for investment advice. Our content is simply for the purposes of informing and educating only. Our information is not intended to provide, nor should it be used, for accounting, investment, legal or tax advice.