Broker Check

401(k) Rollover

For many, retirement is an attractive option whose time has come, even if for some, it is early. Certainly, the pandemic changed how people work. What hasn't changed is the way the American workforce prepares for retirement.

Many live for years as "retired workers" who still need income to survive. Indeed, everyone who paid taxes through decades of work will receive Social Security and Medicare. Unfortunately, Social Security and Medicare are meager stipends most cannot live on.

Then came the 401(k) as a retirement-focused way to put away money. If managed properly, the 401(k) will provide lasting income for the rest of a comfortable and enjoyable retirement. Perhaps you started a 401(k) with a current or former employer and forgot about it?

As someone who is at, or fast approaching retirement age, you should plan. As you plan, keep in mind some rules must be followed. This page presents facts about 401(k)s and answers a handful of 401(k)-specific questions you'll find useful as you plan your retirement.

<b>What is a 401(k)?</b>

What is a 401(k)?

A 401(k) is a tax-deferred government-supported savings plan. The IRS notes a 401(k) "is a feature of a qualified profit-sharing plan…" Interestingly, 401(k) gets its name from the section of the U.S. code that contains laws the IRS must follow. Passed in 1978, a 401(k) gives people retirement funding options beyond the standard Social Security Pension Plan.

Considering a 401(k) Rollover? Here are Your Options

401(k) plans are designed to help individuals save for retirement through tax-deferred contributions that allow you to build up your savings somewhat quickly because taxes aren't paid on the money until you retire or leave your job.

And one great thing about a 401(k) is that your money is easy to move around since you can roll it over into other investments after leaving a job. But what should you do with it?

Here are four easy options:

1. Let Your Former Employer Keep Your 401(k)

If you're considering a job change but aren't quite sure which employer's plan is right for you, this is a good option to consider. By letting a former employer keep your savings, you have more time to evaluate the investment options and plan details of a new employer's plan.

Pros

  • Any earnings remain tax-deferred until withdrawal.
  • You might have access to loans, distribution plans, and other services that might not be available with a new 401(k) or IRA.
  • Under federal law, your 401(k) is still protected from a claim by creditors.
  • Your former employer's plan may offer lower investment fees than a new 401(k) or IRA.

Cons

  • You can no longer contribute to your former employer's 401(k).
  • Your range of investment choices may be limited.
  • Managing multiple plans might be a bit hectic.
  • Fees and expenses for your new employer's 401(k) might be higher than those of your former 401(k) or IRA.

2. Roll Over the Cash Into an IRA

Whether you are aging out of your employer-sponsored plan, retiring early, or switching jobs, rolling over your 401(k) to a Traditional IRA may give you more flexibility in managing your savings. Traditional IRAs are tax-deferred retirement accounts that help you maintain maximum control over investment decisions.

Pros

  • Your savings have a chance to grow tax-deferred.
  • A 401(k) rollover to IRA gives you investment options that may not be available in a new employer's plan or your former employer's 401(k).
  • An IRA rollover simplifies management by consolidating several retirement accounts.
  • Depending on your IRA provider, you might have access to additional services like investing tools and guidance.

Cons

  • You can't borrow against an IRA.
  • Sometimes IRA rollovers may need annual or maintenance fees.
  • Your IRA assets are only protected from creditors if you file for bankruptcy.

3. Roll Over into a New Employer's Plan

A rollover allows you to take your 401(k) plan with you when you leave your old employer. If your new employer accepts the rollover, you can leave your money in your old account or transfer it to the account with your new employer.

Pros

  • Having a single 401(k) makes it easier to manage your investments.
  • Rolling over to your new employer's plan gives your money a chance to grow tax-deferred.
  • Your assets are protected against creditors.
  • Many new plans offer lower costs.

Cons

  • Not all employers accept rollovers from previous employers.

4. Cash Out If You Must

Unless you know what you're doing, don't just withdraw your money. Withdrawing all of the money from your account is a very costly move in the long term. Any cash you withdraw is taxable, not forgetting the 20% federal holding rate.

Pros

  • Having cash at hand could be helpful if you're in need.

Cons

  • Taxes and penalties are steep.
  • The savings no longer grow tax-deferred.

What Is My 401(k) Asset Allocation?

As a retirement savings vehicle, the funds in a 401(k) are known as "solid" assets. Once someone gets to retirement age, the 401(k) funds become "liquid," meaning they are taxable. Fortunately, early withdrawal penalties no longer apply.

More Questions and other FAQs

U.S. tax law can be complicated. Below are just a few of the most important 401(k) related questions people might ask.

I left my job, now what?

  • If you left your job, you probably have a good reason. If you have many work years ahead, just roll the old 401(k) into an IRA. If the new employer does 401(k) offerings, you'll get to start a new 401(k) account. Also consider the options listed above.

Can I live on my 401(k)?

  • The answer depends on two key factors. How much you put away each week and how close you are to retirement age. If you're close to retirement and the financial numbers look good, you can live on a 401(k)

How much should I be saving to retire the way that I would like to?

  • The standard saving rate is between 10% and 15% of your yearly income. With an employer match, the funds could be substantial.

Can I move my 401(k) to an IRA without penalty?

  • There is no financial penalty for following through with a 401(k) to IRA rollover.

How long do I have to roll over a 401(k) after leaving my job?

  • You have sixty (60) days to complete the rollover

What happens if I don't roll over my 401(k)?

  • A 401(k) is a savings account that will continue earning interest until the money is gone. However, financial penalties apply if you miss the 60-day deadline.

Should I pay an advisor to roll over my 401(k)?

  • Hiring a tax advisor or attorney helps you get the most from your money. Better yet, an attorney working with a CPA or other financial officer might help you find money you didn't realize you had coming.

Conclusion

Given the ongoing Covid-19 pandemic, there is continuing talk about early retirement. The Consumer Finance Protection Bureau (CFPB) has useful information regarding early retirement. Conversely, there are things you can do to mitigate the hardships early retirement might cause you and your family.

Following the rules for 401k rollover near Houston, TX does not need to be difficult. All you need is the correct tax advice. The IRS can be sticklers about tax law. Consequently, following all 401k rollover rules ensures your retirement plan stays relevant to your future financial needs. Get in touch with Wealth Standard Financial to ensure that you make the most of your 401(k) rollover!

Let's Get Started!

Thank you!
Oops!