How To Rollover Your Fidelity 401(k) To Avoid Taxes
Written by
Jen Pedrozo
Edited by
Jairo Rodriguez
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Employers often offer a 401(k) as part of their benefits package, but what happens when you leave that employer? Knowing how to get your 401(k) money without paying taxes can save you at tax time.
See Also: Owe Money to the IRS? Most People Don’t Realize You Can Do This
How Can I Get My 401(k) Money Without Paying Taxes?
A 401(k) rollover occurs when you move money from one 401(k) account to a different tax-advantaged account, such as another 401(k) or an individual retirement account. This is the only way to get your 401(k) money without paying taxes.
How To Roll Over Your 401(k)
Fortunately, rolling over a Fidelity 401(k) is a simple process once you’ve decided to do so.
1. Decide What Type of New Account You Want
Determine the type of tax-advantaged retirement account you want to roll your Fidelity 401(k) over to. If your new employer offers a 401(k), this is the easiest option, especially if Fidelity operates your new 401(k) plan. If your employer doesn’t offer a 401(k), you may need to roll your money over to an IRA, which you can open at Fidelity or another retirement plan provider.
2. Open the New Account
Once you’ve decided on which type of tax-advantaged retirement account to open, follow the directions to open it. If you’re opening a new 401(k) account through your employer, you’ll probably do this as part of the onboarding process. To open an IRA, contact your provider.
3. Notify Your Old Account That You Want To Initiate a Rollover
When the new account is officially open, contact your Fidelity 401(k) account manager and inform them that you want to initiate a direct rollover. With a direct rollover, Fidelity will send the money from your original 401(k) directly to your new account.
Note that you need to complete the rollover process within 60 days of initiating it. After the 60-day deadline, the rollover amount will be counted as income and taxed at the appropriate rate for your tax bracket. Monitor the status of your rollover until it’s completed.
4. Report the Rollover on Your Taxes
While you won’t owe any taxes on the rollover amount, you do need to report it to the Internal Revenue Service.
For a direct rollover to another 401(k) account, Fidelity will send you a 5498 form, which you’ll use to add the information to your tax return. If you didn’t do a direct rollover, or if you rolled your 401(k) over to an IRA, Fidelity will send you a 1099-R form indicating the rollover amount.Â
Other 401(k) Options
You don’t have to roll over your 401(k) when you leave a job.
1. Cash Out Your 401(k)
You can withdraw the entire balance, but the 401k withdrawal amount will be taxed as ordinary income, meaning you would add the disbursement amount to your total annual income and be taxed at the rate matching your tax bracket. Depending on the size of your payout, it could push you into a higher tax bracket, resulting in an even higher tax payment than you expected.Â
In addition to paying taxes, you must also pay an early-withdrawal penalty, which is often 10% of the amount you’ve withdrawn. This is paid when you file taxes.
2. Keep Your 401(k) With Your Old Employer
The simplest option is to keep your 401(k) with your old employer. However, there are several downsides to this option:
- You won’t be able to make any additional contributions to the account.
- If your new employer offers a 401(k), you’ll need to keep track of multiple retirement accounts, which can get confusing, especially for the executor of your will when you die.
- You lose access to some 401(k) benefits for the account, such as the ability to take out a loan.
- You might forget about it.
Final Take
To roll over your Fidelity 401(k) to avoid taxes, you should directly roll it over to another 401(k) account or an IRA. Ensure this process is completed within 60 days, or the total will be counted as income and taxed accordingly.
FAQ
Consider these other questions about rolling over a 401(k).- How do I roll over my 401(k) without paying taxes?
- Roll your 401(k) over to another tax-advantaged retirement account within 60 days to avoid paying the taxes and early-withdrawal penalty you'd incur if you were to cash it out.
- How do I roll over my Fidelity 401(k)?
- Decide whether to roll it over to another 401(k) or an IRA.
- Open the new 401(k) or IRA.
- Inform Fidelity that you wish to initiate a rollover.
- Report your rollover to the IRS at tax time.
- At what age is a 401(k) withdrawal tax-free?
- Whenever you withdraw from your 401(k), you'll need to pay ordinary taxes on the withdrawal amount. However, after you reach age 59½, you can make withdrawals without paying the 10% early-disbursement penalty.
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