Reflections

Should You Do A 401(k) Rollover?

By Sean Condon, CFP^®

With the average working adult changing jobs 12 times during their career, knowing what and how to do a rollover with your investment accounts is crucial.^[1] We can all agree that we want to have our financial portfolio as streamlined as possible while paying less in fees, with more options for investing, and tailored to our specific situation.

What is a 401(k) Rollover?

A 401(k) rollover is an option you have when you leave a company and want to transfer your investments into an individual retirement account (IRA). Normally people do this if they are leaving a company, switching to a new company, or retiring, but you can also do a 401(k) rollover into another 401(k) with a new employer.

Pros and Cons of a Rollover

The main benefits of a rollover from a 401(k) to an IRA are the following:

More options. Most 401(k) plans have a limited selection of mutual funds to invest in. IRAs offer these funds plus a much wider spectrum to choose from, including stocks, exchange-traded funds, and individual bonds.
Lower taxes and fees. This will vary depending on your 401(k), but usually having an IRA decreases management fees, administrative fees, and expenses related to each fund you have. An investment advisor can typically analyze your situation on fees very quickly with a review of your account statement.
Transition from a Traditional to a Roth account. Many contributions to a 401(k) plan are done using pre-tax dollars, so although you get a tax deduction, you must pay taxes when you withdraw that money. Rolling money from a traditional 401(k) into an IRA and doing a partial or full Roth Conversion gives you the option of paying taxes now, letting all that money grow tax-free and not be taxed when you withdraw.

There are many benefits to doing a rollover and not leaving your accounts with an old employer’s plan. There are two main reasons why you may want to choose to keep your funds in a 401(k).

If you plan to retire early, you can avoid some tax penalties. There is a 10% tax penalty if you withdraw money from your 401(k) or IRA before the age of 59½. However, if you retire at 55 or later, you can take penalty-free withdrawals from your current 401(k) sponsored retirement plan. You do not get this option with an IRA
If you plan to retire late, you can avoid required minimum distributions (RMDs). If you are still working at the age of 70½, you must start taking required minimum distributions from your previous 401(k) and IRA accounts. The exception to this rule applies to your current 401(k), from which you do not have to take RMDs if you are still working. If you had chosen to rollover 401(k) investments from previous employers into your current employer’s 401(k) plan, none of that money would be subject to RMDs. Traditional IRAs (which means no taxes have been paid on the money yet) do not allow you to withdraw early without incurring a penalty, and you will have to take RMDs at the age of 70½.

How to Do a Rollover

Completing a rollover is a simple process and (you most likely) won’t have to pay any taxes or fees. Once you have chosen a financial institution to open your IRA, contact your 401(k)-plan administrator to let them know where you want your funds transferred.

You can choose to do either a direct or indirect transfer. A direct transfer is highly recommended because it is the simplest form of getting money from one point to the next and you do not have to worry about how or when to deposit funds. With an indirect transfer, a check is made out to you and sent to your address; then you have 60 days to make sure it is deposited where you want it or else you will be penalized 20% on that money, because they are assuming you wanted to make an early withdrawal. The bottom line: stick with a direct transfer so you do not have the potential of incurring that penalty.

Determine if a Rollover is a Good Option for You

There is a lot of flexibility with doing a rollover of some kind, but do not feel like you must take care of it by yourself. We are available to answer your questions, and we would enjoy the opportunity to see if we are a good fit for helping you reach your financial goals. You can reach us by calling (844) 377-4963 or emailing windgate@windgatewealth.com. You can also book an appointment online here.

^[1] https://www.bls.gov/nls/questions-and-answers.htm

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