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401(k) Rollover

If you have just changed jobs or are evaluating your retirement options and like the idea of an IRA, you might be reviewing your 401k rollover options. Many people believe that once they open a 401k, their funds are stuck there until they retire, but you might have many options depending on your employer-sponsored 401k plan.

Therefore, whether you simply want to change your investment strategy or are looking at how to rollover 401k to a new employer, it is wise to review your 401k options before taking action. Retirement planning is an intricate process and usually includes working with multiple accounts to create a nest egg that will last you through your golden years. Working with a financial advisor or professional is highly recommended, but this 401k rollover guide will help you understand what they may suggest.

What is a 401k Rollover?

What is a 401k Rollover?

Any time you choose to take funds out of a 401k account and move them into a new 401k account, IRA, or another tax-advantaged retirement account, this process is called a 401k rollover. Most people encounter it when they get hired into a new workplace and are told to roll over 401k to a new employer. Other common scenarios involve opting for a 401k rollover to Roth IRA once you near retirement age or before to gain tax advantages. The cause of your 401k rollover will determine your 401k options.

401k Rollover Considerations

There are many reasons to consider a 401k rollover, and most of them work in your favor. For instance, the average person will change careers six or seven times, which means you could potentially have six or seven 401k accounts. A 401k rollover helps you consolidate your accounts and ensures that you don't leave funds unclaimed.

A 401k rollover to a new employer can also save you money in some cases since you will then only be paying fees to one account administrator instead of various account administrators. Each employer uses its own plan manager, so paying the fees for multiple accounts can cut into your retirement savings over time.

In addition, savvy investors often like the idea of 401k rollover to IRA to help broaden their investment opportunities. If you leave your retirement savings in an employer-sponsored 401k, your investment options might be limited to mutual funds. Still, once you complete the 401k rollover to IRA, you will have access to other investment options, including exchange-traded funds, bonds, and individual stocks.

Finally, if your balance is below $5,000 or your employer chooses a new provider, you may not have a choice in whether or not a 401k rollover is instigated. In this situation, taking control of your 401k rollover or talking to a financial advisor might ensure the final 401k rollover is advantageous to your overall rollover plan.

401k Rollover Pros and Cons

Like most financial decisions, there are pros and cons to consider before opting for a 401k. While you may not be able to avoid a 401k rollover to a new employer in some cases, you need to be aware of all of your options to ensure your money is utilized to align with your current retirement planning.

Some of the top 401k rollover pros have already been reviewed and include factors such as lower administrative fees, simplified management via consolidation, and more investment options (when considering a 401k rollover to IRA).

On the other hand, there are some cons to consider as well. Sometimes it is not the best idea to rollover 401k to a new employer because the new employer does not offer as many investment options as the old employer. Sometimes the fees on the new account are also highest, in which case it may be better to leave your old 401k account where it is.

When it comes to a 401k rollover to IRA, keep in mind that a 401k can be accessed if you change jobs after 55 without penalties. In contrast, an IRA will incur penalties if accessed before the official retirement age of 59.5. It is best to talk to a financial expert before completing a 401k rollover in most instances.

Frequently Asked Questions

What is a 401k rollover?

A 401k rollover is when you move funds from one 401k account to another or into an IRA. 

Plan participant leaving an employer typically has four options (and may engage in a combination of these options):
Leave the money in the former employer’s plan, if permitted;
Roll over the assets to his new employer’s plan, if one is available and
rollovers are permitted; Not all employer plans accept rollovers.
Roll over to an IRA; or
Cash out the account value. In
general, tax penalties will apply if the employee
is below age 59½ and the distribution will be
taxed as ordinary income.

What happens if I don't rollover my 401k?

If you don't rollover your 401k, it will continue to be maintained by the old administrator, but contributions will cease (as long as the balance is over $5,000).

How long do you have to rollover a 401k after leaving a job?

You have 60 days to rollover a 401k after leaving a job.

Can I move my 401k to an IRA without penalty?

Every situation is different, so it is best to talk to a financial advisor about your options.

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