The 401(k) Rollover Process
We understand that planning for retirement can be complex and overwhelming. One crucial aspect of retirement planning is handling your 401(k) when transitioning between jobs or retiring. On this page, we'll discuss the term "Rollover" and how it is important to consider all of your options. While rolling over your 401(k) to an Individual Retirement Account (IRA) can be a strategic move, it may not always be the best option.
If you have recently left a job, retired or are just looking to organize your accounts you are in the right place!
Rest assured, as experienced financial advisors, this is something we help our clients with each and every day. We are here to not only help educate you on the process of a rollover, but also help you decide if it makes sense for you in your current situation.
First of all, what is a Rollover?
A rollover refers to the process of moving funds from one retirement account to another without incurring any tax penalties or penalties for early withdrawal. When leaving a job or retiring, you might have a 401(k) account with your former employer, which is a tax-advantaged retirement savings plan. Instead of cashing out the 401(k) or leaving it behind, you have the option to roll it over to an IRA.
Why would I roll over my 401(k) to an IRA?
Greater Investment Control: One of the primary reasons individuals choose to roll over their 401(k) to an IRA is the increased investment control. 401(k) plans typically offer a limited selection of investment options chosen by the employer. In contrast, IRAs provide access to a broader range of investment choices, including stocks, bonds, mutual funds, exchange-traded funds (ETFs), and more. This flexibility allows you to tailor your investment portfolio to match your risk tolerance and long-term financial goals.
Greater Control of Distributions: Oftentimes during retirement, distributions out of a 401(k) must be set up a certain way and changes to those instructions are harder to make. Each plan will have their own rules when it comes to taking money out in retirement.
Consolidation and Simplification: Over the course of your career, you might accumulate multiple 401(k) accounts from various employers. By rolling them into a single IRA, you simplify your financial management, making it easier to track and manage your investments.
Avoiding Taxes and Penalties: With a direct rollover from a 401(k) to an IRA, you can avoid immediate taxes and penalties. The funds transferred are not considered a distribution, so they remain tax-deferred until you start making withdrawals during retirement.
Opportunities for Roth Conversions: Rolling over a 401(k) to a Traditional IRA can create opportunities for possible Roth conversions. A Roth conversion allows you to move pre-tax money from a Traditional IRA to a Roth IRA, potentially giving you tax-free withdrawals in retirement.
Beneficiary Planning: IRAs often offer more flexible beneficiary options than 401(k) plans, allowing you to designate beneficiaries and control how your assets are distributed after your passing.
Exploring All of Your Options
When it comes to planning for your retirement, the choice between keeping your 401(k) at the current custodian or considering an Individual Retirement Account (IRA) involves careful consideration of various factors. Before deciding if a rollover is for you, it's essential to weigh ALL the pros and cons.
It is also equally as important to speak to someone at within your Benefits Department when you leave your job or retire. Each plan is set up is differently. Some employers require you to move your plan within so many days from leaving the company while others will allow it to stay indefinitely. It is very important to keep any paperwork they send you outlining these specific details.
Why would I want to consider keeping my 401(k)?
Your current plan may offer an array of well-performing investment options: It would be important to compare a list of your investment options inside of your 401(k) with all of the options that you would have in your new IRA.
It may have low administrative fees: Yes, your 401k(k) has investment management and account fees. Sometimes it can be hard to find out the specifics on these fees but comparing what you are currently paying to what you might pay in fees if you rollover to an IRA is one thing to consider.
It may have valuable features that align with your long-term goals.
It's worth noting that cashing out your 401(k) is also an option, though it often comes with tax implications and potential penalties. While it might provide immediate funds, it can significantly diminish your retirement nest egg. Careful consideration of your financial needs and future objectives is crucial before making this choice.
We are committed to providing you with transparent and balanced guidance. Our experienced team can help you explore the various retirement savings options and assist you in making an informed decision. We're here to analyze your unique situation, discuss the advantages and disadvantages of each path, and support you in creating a retirement strategy that aligns with your aspirations.
Your financial well-being is our priority, and we're dedicated to helping you make the choice that best serves your long-term interests.
The Rollover Process
After going through all of your options, if you decide to rollover your 401k (or other workplace plan) to your very own Individual Retirement Account (IRA), the process is fairly simple and outlined below:
STEP 1: GET A STATEMENT
First, obtain a recent statement of your current plan. You can also pull this information if you have online access to your account. We are looking for current 'vested' balance, any Roth or post-tax contributions and where the assets are currently held. It's not a problem if you don't have this so don't stress on this step!
STEP 2: OPEN YOUR NEW Simplicity Financial IRA (if you don't already have one)
You will sign some of our forms and then we will help determine the correct investments. You will do this step with your advisor.
Keep in mind that if you have BOTH Pre-tax and Roth contributions in your 401(k) then we will need to open two accounts- one for the Pre-tax funds and the other for the Roth funds.
STEP 3: INITIATE THE ROLLOVER
Plan to schedule some time with our Operations staff to initiate the rollover. During this appointment someone from our office will reach out to the 401(k) company to begin the rollover process with you on the phone. Times will vary depending on the company but we suggest allowing one hour for this call (although sometimes it will be completed much sooner).
The actual rollover is completed one of two ways:
1) Initiating the rollover via a phone call (with you on the line) or
2) We will have you sign their paperwork and file it for you.
NOTE: The plan company will ask if you have read the Special Tax Notice in the last 180 days. You can find a copy of this form HERE.
STEP 4: FUND THE IRA
Every 401k company is different. Some will mail you a check and others will mail it directly to us. We will walk you though this step and how to get it electronically deposited into your IRA. Even if you receive the check - the check will be made payable to your IRA as to avoid it being a taxable event.
That All Makes Sense, Now What?
As your financial advisor, it's important for you to know that I operate as a fiduciary. That means I am legally and ethically obligated to act in your best interests at all times. Your financial well-being is my top priority.
Being a fiduciary isn't just a term; it's a commitment. It means that my duty is to you, and only you. I provide advice and make decisions based solely on what benefits you the most.
Click below to connect with us so we can help walk you through this important financial decision.