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Summary | 9 Annotations
If you have a 401(k) plan through your employer, there are certain times when you may have the option of rolling it over to another account. A 401(k) rollover typically refers to moving your funds into a different retirement account. The transfer usually occurs when you leave a job or transition into retirement. “Rollovers can be simple if you prepare for the process ahead of time and learn what to look for and how it’s done,” says Jay Jumper, CEO of Future Capital based in Chattanooga, Tennessee.
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If you’re leaving your current workplace and have a 401(k) plan with the company, you’ll typically face several choices related to the account. You might choose to rollover the 401(k) plan. In this case, the balance in the 401(k) plan will be moved to a new account. This new account might be a 401(k) plan at your new employer or an individual retirement account. “While an old 401(k) can sometimes be rolled over into your 401(k) with a new employer, the most common course of action is to transfer those funds into an IRA,” Jumper says.
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Sometimes employees are able to leave the funds in the account with the former employer. “Keeping your money with your old employer comes with more constraints,” says Pam Krueger, CEO and founder of Wealthramp in Tiburon, California. “You have limited investment options, less control over costs and you have to follow plan rules. Plus, it’s another account to keep up with.”
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If you have a check made payable to you, “you’ll get charged with the mandatory 20% withholding tax,” says Paul Sundin, a CPA and tax strategist at Emparion in Chandler, Arizona.
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“If you do a rollover to a Roth IRA, you will owe tax on the rolled over amount right away,” Jumper says. With a Roth IRA, you will pay taxes on the contribution now, but the future withdrawals are often tax-free.
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If you decide to roll over your 401(k), your plan sponsor may directly transfer the money to your new account, which can be done without incurring penalties or taxes. The plan sponsor could also mail you a check directly. When a check is sent to you, it will arrive with a 60-day rule. “You have 60 days to deposit it into a qualified account, or it will incur taxes,” Sundin says. You might also face an early withdrawal penalty if you are not at least 59 1/2 years old.
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“Choosing to invest in an IRA can come with some great perks over a 401(k), including a more diverse selection of funds to invest in,” Jumper says. You might decide to place funds into different types of investments in the IRA, such as stocks, bonds, exchange-traded funds and mutual funds.
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Before carrying out a 401(k) rollover, it may be helpful to talk to your family and other advisors or mentors about your future plans. Think about when you’ll want to retire, what type of lifestyle you want to lead during retirement and other activities or hobbies you may be interested in pursuing later on. “The goal is to use this money to help you remain financially secure throughout your retirement years,” Krueger says. Lining up current funds, savings strategies and expected distributions with your life aims can guide your 401(k) rollover decision.
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