401(k) rollovers: what are they and how do they work?
Discover why 401(k) rollovers are so important and how they can help you maximize your retirement savings.
Summary
A 401(k) rollover involves moving money from your current 401(k) to another retirement account, such as an IRA or a different 401(k) plan.
401(k) rollovers are becoming increasingly common, with over $770 billion rolled from workplace retirement plans to IRAs in 2022.
While rolling over your 401(k) can be beneficial, it’s a complicated process that can take time and have adverse tax implications if you don’t manage it correctly.
Unbiased can match you, for free, with a financial advisor who can help you navigate your 401(k) rollover and help you stay on track to meet your retirement goals.
What is a 401(k) rollover?
A 401(k) rollover is the process of moving your retirement savings from a 401(k) plan or similar account to another retirement account, such as an IRA or a different 401(k) plan.
You have 60 days from the date you receive the money or assets to complete your rollover. Alternatively, you can opt for a direct rollover, where the funds are transferred directly into your new account.
While it sounds simple, the process can be quite complicated and is best completed with the help of a professional.
According to analysis by the Council of Economic Advisers in 2022, Americans rolled over about $779 billion from workplace retirement plans to IRAs. Recent IRS data states almost 5.7 million people rolled over money to an IRA in 2020. This is compared to approximately 4.3 million people rolling over around $300 billion to IRAs in 2010.
Experts suggest 401(k) rollovers will rise in popularity in the coming years, with more people, with more wealth, entering retirement and trying to ensure their savings last flonger.
Why do people choose to roll over their 401(k)?
There are several reasons why people may choose to do a 401(k) rollover.
For example, you’ve recently left a job and want to bring your 401(k) with you, either transferring it to your new employer’s 401(k) plan or converting it into an IRA instead of leaving it with your former employer.
Alternatively, you’re closing in on retirement and want to roll your savings into a Roth IRA so your money can grow tax-free in the lead-up to and during retirement.
However, this option does mean you’ll have to pay tax on your existing 401(k) at the time of conversion, which could mean a hefty tax bill in the year you roll over.
What are my rollover options?
If you’re considering a 401(k) rollover, here are some of your options:
Roll over your 401(k) to an IRA
You can rollover your 401(k) to an IRA.
This will likely mean you have more investment choices and lower fees. Any taxes on the money rolled over and earnings, while it’s in the new retirement account, will be deferred until you make withdrawals in retirement. However, if you choose to withdraw early, you may be taxed.
You can also choose to roll over your 401(k) to a Roth IRA. However, this is a taxable event, meaning you’ll pay tax on the amount you rollover in the year you rollover.
If you have a Roth 401(k), you will not pay tax if you choose to roll it into a Roth IRA, as both types of accounts are funded with after-tax dollars.
For more information about 401(k) to IRA rollovers, click here.
Roll over your old 401(k) to your new employer’s 401(k) plan
If you’re moving jobs, you may choose to rollover your old 401(k) to your new employer’s plan.
This means you can keep all your retirement savings in one place and remove the risk of losing track of your money.
Before you start this process, check if your new employer accepts rollovers. You should also compare fees and investment options in both accounts to see what the best financial option is.
Rolling over a 401(k) from one employer to another does not typically incur any tax.
You can also see if the plan administrator at your old company can do a direct rollover – where your plan administrator makes the payment directly to your new account.
Leave it alone
If you leave a job, you can also choose to leave your 401(k) where it is if your old employer allows it.
By doing this, nothing changes. Your 401(k) will continue to grow tax-deferred, and you can review it as often as you like.
It’s worth bearing in mind you will not be able to make additional contributions to your old 401(k) plan if you leave it where it is. You may also be charged higher fees as an ex-employee.
Your ex-employer could also choose to move your account to another provider or close your account. However, they will need to notify you in writing if this happens.
Cash out your 401(k)
Finally, you could decide to cash out your 401(k).
This is very rarely advised as it can be very expensive, as withdrawals will be subject to taxes and penalties, including federal and state income tax and an early withdrawal fee of 10%.
What are the pros and cons of a 401(k) rollover?
Before choosing whether to do a 401(k) rollover, it’s best to weigh up the pros and cons. Here are a few to get started.
The pros of a 401(k) rollover:
Your retirement savings are all in one place: Fintech company Capitalize found that an individual with a forgotten 401(k) account has the potential to forgo almost $700,000 in retirement savings over their lifetime.
More control over your money: As all your money is where you want it to be, you decide how and where to invest it. IRAs often have a wider range of investment options for you to choose from.
Tax benefits: Depending on your unique situation, rolling over your 401(k) into a traditional or Roth account has its tax benefits. Either you don’t pay any tax now, and your money continues to grow tax-deferred, or you pay one lump sum, and your money grows tax-free.
The cons of a 401(k) rollover:
Limited timeframe: If you want to roll over your 401(k), you only have a short window in which to complete the process: 60 days.
Penalties and tax implications: If you miss the window or roll your 401(k) from a traditional to a Roth account, you will have to pay taxes and possible penalties. This can eat into your retirement savings if you don’t plan effectively.
Should I work with a financial advisor on my 401(k) rollover?
While they are worthwhile, 401(k) rollovers are notoriously complicated. As well as being time-consuming, the process is filled with different rules and regulations you must follow.
That is why, if you’re considering a 401(k) rollover, it’s best to get expert financial advice.
A financial advisor can help you explore your options, find the best plan for your needs, and manage the process, ensuring you’re maximizing your retirement savings and remain on track to meet your goals.
Unbiased match you with an SEC-regulated financial advisor.
Simply tell us more about your financial situation, and we’ll match you with an advisor best suited to meet your needs. The process is completely quick, easy, and free, and there is no obligation to continue.
401(k) rollover FAQs
Senior Content Writer
Rachel is a Senior Content Writer at Unbiased. She has nearly a decade of experience writing and producing content across a range of different sectors.