401K CONSULTANTS IN GRAND RAPIDS, MICHIGAN
What is a 401k Retirement Plan Rollover?
So, you’ve left your job, or plan to, but still have a 401k retirement plan with your old employer, with a tidy pile of money in it.
Question: What should you do with it?
You’ve got four options:
- Cash it out.
- Leave the money in your old company’s plan.
- Move your money into your new employer’s plan.
- Roll it over to an IRA
Go for a 401k rollover to an IRA.
Integrated Financial Services, Inc. is a 401K consulting firm that specializes in planning and implementing 401K rollovers consistent with your long-term goals and risk tolerances.
However, the first option is rarely the best one. If you cash in your 401k retirement plan, the tax consequences can be stunning. Almost all, 401k retirement plan consultants will advise you against it. Among the drawbacks: your employer is required to withhold 20% for federal income taxes, you’ll pay a 10% premature withdrawal penalty, (if you are younger than 59½), and the money will no longer be tax-deferred for your retirement. In addition, since it will be counted as taxable income in the year you receive it, you may find yourself in a much higher tax bracket. On larger balances, it’s common to see a 35-40% loss due to these factors. On the other hand, The tax benefits of rolling over your 401k plan to another tax-qualified plan are many. 401k retirement plan consultants or 401k plan advisors can help you weigh the pros and cons before you make a decision.
The other 3 options preserve the tax-deferred status. If you rollover the funds of your 401k retirement plan, make sure you choose a ‘trustee to trustee’ transfer, also known as a “direct rollover.” With this method, your old employer writes a check directly to the custodian that administers your new plan. This avoids taxes, penalties, and the mandatory 20% withholding requirement.
Here are the pros and cons of each option as listed by our 401k
retirement consultants at Integrated Financial Services Inc.
Reasons not to rollover your 401k to an IRA
401k to IRA Rollover– There are a few reasons why you may choose not to rollover your 401k retirement plan
- The investments and expenses of the old 401k are so attractive, they cannot be replicated.
- 401k plans have loan options– IRAs do not.
- If you’re still working for your employer at age 72, you can delay taking Required Minimum Distributions (RMDs) until you retire. Funds in IRAs must begin RMDs at the age of 72.
Note: If you have less than $5,000 in your 401k, your old employer may require that you remove your funds from the plan after leaving.
Rollover an old 401k Retirement Plan to a new employer’s 401k Retirement Plan
- This option may be worthwhile if you have a smaller balance or you like the investment’s options and costs of the new plan.
- It allows you to consolidate 401k retirement plans giving you one less account to worry about.
Rollover your old 401k Retirement Plan into an IRA
Conventional wisdom has long been to take your 401k retirement plan with you and roll it into an IRA that you control. For up to 95% of retirees, this may be the best option for many reasons. Many 401k plan consultants and financial advisor favor this choice.
IRA vs 401k
You can set up your own plan for your nest egg, with the investment options that you choose. 401k retirement plans are established by your employer and it is their plan- you are just a participant. You are subject to the rules they have adopted. You are limited to the 20 or so allocation choices that the company allows with the custodian that they have chosen. Rolling to an IRA may make sense as you have a much broader range of investment options. You can choose from over 10,000 mutual funds, and just about any individual stock, bond, annuity, or ETF. With many custodians, a huge selection of no-load mutual funds is offered to choose from with hundreds of different fund companies.
- You can divide your funds into goal specific allocations. You can do different things such as income with a portion of your funds that are not available in a 401k retirement plan. Example: setting up a stream of lifetime monthly income that you are guaranteed never to outlive– like a traditional pension.
- If you choose to set up a Rollover IRA to receive your 401k retirement plan into a Traditional IRA — aka not a Roth — you won’t have to pay any taxes when you switch your account according to the Internal Revenue Service rules which govern the tax treatment of 401k to IRA rollovers. If you have under-performing funds, you can make changes as you choose. 401k plans historically are slow to change their investment allocation options, based on performance or fees.
- More options for early withdrawals: Traditional IRA allow early distributions without penalty — (taxes are still owed) — for higher education expenses and a first-time home purchase.
- Inservice Rollovers. Many 401k retirement plans allow Inservice rollovers and withdrawals for individuals who are age 55 or older (often age 59 ½). With these provisions, an employee can take all or part of their 401k balance and roll it over to an IRA of their choice as an Inservice Rollover. They can remain an active participant in their employers’ 401k retirement plan and still continue to receive the company match on employee contributions. Often individuals who are approaching retirement are concerned with large potential losses and want investments that are not offered by the 401k retirement plan. Seeking help from a 401k consultant makes it easier for them to better understand the situation and set their expectations.
Can you rollover an IRA to a 401k Retirement Plan?
Yes. You can rollover IRA to 401k retirement plan, assuming the plan allows this type of rollover. Roth IRAs can only be rolled over to another Roth IRA. You can always check with your 401k consultant or human resource department to check whether your retirement plan allows you to do such a rollover. This is one of the least know options in 401K retirement planning. It is an illustration of why it pays to work with professionals’ consultants who know the rules. An IRA to 401k rollover, typically doesn’t receive much attention as it is uncommon. It might be worth considering for the following reasons:
- Potential for early access to your money: This little known provision of some 401k retirement plans is that if you retire after age 55, but before age 59½, you may be able to start tapping your 401k without penalty. If you retire earlier than 55, this provision doesn’t apply. Qualified distributions from traditional IRAs can’t begin until 59½ unless you start a series of substantially equal distributions known as a 72(t) plan. This is where you set up distributions for at least 5 years or until you turn 59½, whichever comes last. You must use an IRS approved calculation method which factors in your IRA balance, age, life expectancy, and a reasonable interest rate, based on treasury rates. It could mean taking much more or much less than you need or receiving the income for a longer period than you want to.
- If you work past age 72, you may be able to put off distributions. A traditional IRA required minimum distributions to begin at age 72. A 401K does too – IF YOU ARE RETIRED. However, if you’re still working, you can postpone required minimum distributions from a 401K until you retire.
Are rollovers permitted from 403b Retirement Plan to a 401k Retirement Plan?
Yes. According to The Internal Revenue Service (IRS) you can do rollovers between 403b and 401k plans, IF your employer allows it.
401k plans: are used by “for profit” corporations (the private sector)
403b plans: are used by “not for profit” and governmental entities.
In the real world, employers don’t maintain both types of plans.
If you changed jobs and moved from the private sector with a 401k retirement plan to a non-profit employer who offers a 403b retirement plan, you could rollover the balance of your 401k to a 403b IF your new employer’s plan accepts rollover 401k to 403b & vice versa
While the IRS regulations allow the rollover of assets between 401k retirement plans and 403b retirement plans, employer’s plan documents must be written to allow such rollovers.
If you have questions about your own situation, please call us at (616) 942-9080 and we will be happy to answer any questions that you may have.
Frequently Asked Questions
401k retirement plan