Your 401k Rollover Retirement Savings Plan
You’re planning on retiring soon – congratulations! After decades of hard work and savings, now is the time to embark on a new life with retirement travel or other retirement activities, or perhaps a new career. There are a lot of decisions to make, and one of the most important is whether to roll over your 401(k) retirement savings into an IRA.
The Benefits of 401(k) Rollovers
- When you roll over your employer-sponsored 401(k) retirement savings to an IRA, you have full control over your retirement investments instead of a choice of a handful of investments in your employer’s plan.
- Rather than receiving multiple retirement savings plan account statements, you have one, consolidated statement.
- Determining your required minimum distribution amounts is simpler when you have one 401(k) rollover account.
- You continue to benefit from tax-deferred compounding interest.
How Does a 401(k) Retirement Plan Rollover Work?
When you retire or change jobs, you have the option to rollover your 401(k) into your new employer’s retirement savings plan or either a Roth or traditional IRA plan. You have three options when deciding whether or not to roll your 401(k) into another tax-advantaged retirement savings plan. They include:
- Taking a Cash Distribution from Your Retirement Savings Plan
If you decide to receive a cash distribution from your 401(k) retirement savings plan, the plan administrator will cut a check payable to you. These distributions are subject to federal and state income taxes. Additionally, your employer must withhold 20% from your distribution check as a prepayment of estimated taxes on retirement. Depending on your tax bracket at the time of distribution, you may own more or less than the 20% withholding. And if you’re under age 59 ½, your 401(k) distribution may be subject to a 10% withdrawal penalty. - Indirect Rollover from Your 401(k)
Another option is to choose to receive a cash distribution from your 401(k) administrator and deposit this money in a Roth IRA or traditional IRA. Your employer will still withhold 20% for prepayment of federal income taxes. However, to avoid taxes and penalties, you must deposit the entire 401(k) retirement plan distribution – plus the 20% mandatory employer withholding – into your IRA within 60 days. - Direct 401(k) Retirement Savings Rollover
When you choose a direct retirement savings plan rollover, your 401(k) plan administrator makes a check payable directly to the new custodian of your Roth IRA or traditional IRA. This is often called a trustee-to-trustee transfer and unlike the other 401(k) transfer options, there are no employer tax withholding requirements, no taxes and no penalties. Even better, without the withholding and potential penalties, you will have more retirement savings available to continue to grow tax-deferred.
For most people, choosing a direct 401(k) savings rollover is the smartest decision since it avoids potential tax liabilities and penalties, while allowing you to continue to build tax-deferred or tax-free retirement savings income.
