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Strategies for rolling over a 401(k)

Strategies for rolling over a 401(k)

Article Date June 2018

When you are starting a new job, one of your first priorities is to decide what to do with your old 401(k). You worked hard for your money and you want it to continue building a comfortable nest egg for your retirement years.

Like most investors, you will probably be rolling over your old employer-sponsored 401(k) plan to a new plan. When you take a 401(k) with you, there are several 401(k) rollover options to choose from. You can:

  • Transfer to a new 401(k). This is a good choice if you like the investment options in the new plan and if the administrative fees are reasonable. Rolling over your 401(k) savings into one 401(k) account also makes it easier to manage your money. One drawback is that 401(k) plans don’t offer as many investment options as an IRA or Roth IRA.
  • Transfer to a traditional IRA. When you contribute to a traditional IRA, you’ll see tax-free growth of your retirement savings and get more investment choices. Traditional IRAs aren’t taxed until you begin withdrawing money at the age of 59½. You will pay a penalty fee for early withdrawals.
  • Transfer to a Roth IRA. Like a traditional IRA, a Roth IRA offers a wide range of investment options. Because your money is taxed upfront, you won’t have to pay taxes later, when you can start taking withdrawals. That’s an advantage if you anticipate moving into a higher tax bracket when you retire or if you intend on leaving a large amount of money to your heirs. One other thing that’s good to know about Roth (and traditional) IRAs: there is no limit to how much money you can transfer from your old 401(k).

You can also leave your money in an old 401(k) account, but that presents some drawbacks. You will no longer be able to contribute to the plan and there could be withdrawal restrictions. Your former employer may close your account if you have a small balance and/or force you to withdraw funds when you reach normal retirement age. It’s also cumbersome to manage multiple 401(k) accounts.

Beware, if you are thinking about cashing out your 401(k). If you are younger than 59½, you’ll be subject to a 10 percent early withdrawal penalty. Plus, your former employer will be required to withhold 20 percent of your money for federal taxes. And don’t forget that you’ll have less money for your retirement.

If you are ready to roll over your money to another 401(k), IRA or Roth IRA, here are four steps you should follow:

  • Open a new account. As soon as you are eligible, enroll in your new employer’s 401(k) plan. Or, you can open an IRA or Roth IRA. The law gives you 30 days to decide what to do with your 401(k) when you switch employers.
  • Ask the administrator of your old 401(k) to make a direct roll over to your new 401(k) or your IRA or Roth IRA. A direct transfer ensures that your retirement savings remain tax-deferred (unless you choose to open a Roth IRA). In some cases, you may receive a check in the mail made payable to the custodian of your new 401(k) or IRA. No worries. Just deliver the check to the new custodian and the money will be deposited into your account without interruption. If a check is issued in your name (indirect rollover), you have 60 days to deposit the money in a new retirement account; otherwise, it is considered a taxable distribution.
  • Choose your investments. You will need to choose the right mix of stocks and bonds for your new account. Companies such as Synergy Group provide expert advice on which funds may be best for you.

As you make plans to roll over your 401(k) to a new account, remember that there may be a nominal one-time fee for transferring your money.

Whether you choose to roll over your old 401(k) to a new 401(k), traditional IRA or Roth IRA, you’ll maximize your retirement earnings if you pay close attention to the market and make good investing decisions.

Investment advisory services offered through Global Financial Private Capital, LLC. This material is for informational purposes only. It is not intended to provide tax, accounting or legal advice or to serve as the basis for any financial decisions. Individuals are advised to consult with their own accountant and/or attorney regarding all tax, accounting and legal matters.

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