401k Rollover Options

Each 401k rollover option offers different pros and cons.

Working for a company that offers a 401k plan might give you the ability to roll over your account into another plan. Typically, this option is only available if you leave your job or retire, but some plans allow you to roll over your 401k even while you’re still working.

The actual process of rolling over a 401k is straightforward — simply make a request to your administrator and transfer the money. But there could be tax and investment consequences of your decision, so it’s one not to be made lightly.

Here are five options you have for rolling over your 401k.

1. Leave Your Money Where It Is

Some — but not all — employers allow you to keep your money in their 401k plan even if you terminate employment with them. In some cases, leaving your money where it is might be one of the best 401k rollover options.

Advantages

  • You don’t need to rush a decision.
  • Funds remain in a tax-deferred account.
  • You continue to enjoy the investments offered by your former employer’s plan.
  • If you’ve stopped working, you can withdraw funds starting at age 55.

Disadvantages

  • You can no longer make contributions.
  • Investments are limited to current offerings, as chosen by the employer.
  • Tracking assets might be more complicated if you have other investments elsewhere.

Don’t Miss: Big 401k Questions to Ask Your Employer

2. Roll Over to the New Employer’s 401k Plan

When you change jobs and your new employer has a 401k plan, 401k rollover rules typically allow you to move the assets from your former employer’s plan to your new employer’s plan.

Advantages

  • You can continue to make contributions via salary deferral.
  • Working for the same company might make it easier to access customer service.
  • Funds remain in a tax-deferred account.
  • You might have access to new investment options.
  • Fees and expenses might be lower in the new plan.

Disadvantages

  • Investment options are limited to what your new employer provides, meaning you might have to give up investments that you liked in your former plan.
  • Fees and expenses might be higher in the new plan.

Learn: How to Maximize 401k Contributions— 9 Smart Strategies

3. Roll Over to a Traditional IRA

You can roll over your 401k money to an existing individual retirement account or to a brand new one.

Advantages

  • Funds remain in a tax-deferred account.
  • You have access to essentially unlimited investment options in an IRA, with the exception of assets such as life insurance or collectibles.

Disadvantages

  • IRAs might have annual fees or other additional expenses.
  • Assets might not be protected from creditors.
  • You can’t access funds until after age 59.5.
  • You can’t borrow against the account.

4. Roll Over to a Roth IRA

A Roth IRA can accept 401k rollover money just like a traditional IRA can. The main difference between a Roth IRA and a traditional IRA is that Roth contributions are made after taxes are taken out, and qualified distributions are tax-free. This results in the biggest drawback for rolling a 401k into a Roth IRA, as the entire 401k rollover balance becomes taxable.

Advantages

  • Roth IRA assets grow tax-free and remain tax-free upon distribution.
  • Additional contributions grow tax-free.
  • Investment options are as unlimited as with traditional IRAs.

Disadvantages

  • Money rolled over from the 401k is taxed immediately.
  • You can’t access funds until after age 59.5.
  • You can’t borrow against the IRA.
  • Assets might not be protected from creditors.
  • IRAs might have annual fees or other expenses.

Find Out: How to Convert Your 401k to a Roth IRA

5. Withdraw Cash From Your 401k

Although not technically a “rollover” in the strictest sense of the word, one option for what to do with your 401k assets is to take a cash distribution. You can withdraw your money as early as age 55 if you’ve separated from service. But as with other retirement accounts, like IRAs, you’ll have to wait until you turn 59.5 if you’re still working.

Advantages

  • With cash in your own pocket, you have the freedom to do whatever you want with it.
  • You’ll avoid paying investment management fees or account maintenance fees.

Disadvantages

  • A large distribution could push you into a higher tax bracket.
  • The IRS will withhold 20 percent of your distribution to make sure you’re paying your taxes on it.
  • Your 401k withdrawal is immediately taxable as ordinary income.
  • Your money will no longer be invested and earning a return.
  • If you’re under age 59.5 — or under age 55 if you’re no longer working — your distribution might be subject to an additional 10 percent early-withdrawal penalty.

Weighing Your Options

The 401k rollover strategy you choose could have serious ramifications. If you’re not careful, you could end up with a huge tax bill or get stuck with an account that has high expenses and/or low returns. Examine all your options thoroughly before you make your decision. You might also want to consult with a financial or tax advisor before you proceed.

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