Rollin’ Over Your 401(k)

You may have something in common with Creedence Clear Water Revival and Tina Turner if you have ever “left a good job in the city working for the man every night and day.” When you find yourself in this position then you may need to consider “Rollin’, Rollin’, Rollin’”, your 401(k) assets into an individual retirement account, better known as an IRA. While this article will reference 401(k) accounts, this is also broadly applicable to 403(b), 457(b), Thrift Savings Plans (TSP), and other qualified retirement accounts. In this article we will review your options and some of the pros, cons, and general information to be aware of.

Everyone has a unique situation that will influence their decision on whether rolling over their 401(k) is suitable for them. Let’s start with the investment options you have available:

Option 1: Directly roll your 401(k) into an IRA. This article will discuss the pros and cons of this possibility below.

Option 2: You can often leave the money in your 401(k) account. While you are not putting your current income into the existing account, you are still receiving the tax deferred growth inherent in retirement accounts.

Option 3: Typically, you can also directly rollover your old 401(k) plan into your new employer’s 401(k) plan.

Option 4: If you are over 59.5 you are eligible to receive distributions from your 401(k) plan. However, be aware that if you are under that age, you may be subject to a 10% early withdrawal penalty on top of your ordinary income tax.

 These are some of the positives that can come from rolling over your 401(k):

1. 1. More investment options – Many 401(k) plans that employers offer may only have five to eight investment funds to choose from. One of the reasons for this is because studies have shown that more choices leave employees confused and many decide not to participate. Rolling over your 401(k) to an IRA gives you flexibility to invest in many different funds. IRA’s have some restrictions on items such as collectibles or life insurance, but there are thousands of mutual funds, exchange traded funds (ETFs), or bonds that you will gain access to in an IRA.
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   2. Collaborating directly with a financial advisor – Your employer may or may not give you access to an advisor to receive guidance on your 401(k) investments. However, if you would like someone who can provide more comprehensive advice, then partnering with a financial advisor to perform the rollover will provide you with a resource who can more broadly aid you in your financial journey.
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   3. Potentially lower Fund Fees – There are typically cost associated with administering your 401(k) account that are passed on to the investor in the form of general administration fees, account maintenance charges, and higher fund fees. In general, an IRA does not have these same account administration addons. However, some large corporations and the federal government’s TSP system often have lower fees.
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   4. Less financial clutter – If you have had multiple job changes during your career you may have numerous retirement accounts that each have their own statements, logins, and there will be multiple accounts for required minimum distributions (RMDs) in the year you turn 73. Rolling your 401(k)s into an IRA means there is only one login to remember and one account that RMDs will come from.

There are also potential cons to rolling over your 401(k) that you should be aware of listed below:

1. 1. Delayed RMDs – If you are over 73 and still working at that employer, then you can delay RMDs from that employer.
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   2. Bankruptcy and Creditor Protections – 401(k)s have federal regulations that have robust bankruptcy and creditor protections. IRAs typically have similar bankruptcy protection, but creditor protections vary state by state.
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   3. Different early withdrawal rules – Between the ages of 55 – 59.5 if you are laid off or retired you can typically take penalty-free early withdrawals from your 401(k) with that employer. Whereas with an IRA, with a few special exceptions, you must wait until 59.5 to avoid a 10% penalty.

Finally, here are some general tips to know about rolling over your 401(k) into an IRA.

1. 1. Early Withdrawal – Speaking of the 10% early withdrawal penalty, it is best to leave your money in either a 401(k) or IRA so you do not have to take that added hit. The IRS put the penalty in place to encourage people to leave their assets invested until retirement. However, we all know that life has its difficulties, and there are certain hardship exceptions for items such as medical bills, funeral expenses, avoiding foreclosure, etc.  
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   2. Roth Conversion – If the contributions made to your 401(k) account were in pre-tax dollars, you can roll them directly into a Roth IRA. However, be aware that you will be subject to current-year income tax on the entire amount converted to a Roth IRA. The benefits of the conversion include not paying future taxes on qualified withdrawals, and there will be no RMDs.
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   3. Direct Rollover – It is typically best to do a direct rollover into your IRA versus getting your prior company’s HR department to send you the money directly. If they send it to you, there can be a 20% tax withholding, and you only have 60 days to roll over the full amount to an IRA plan. However, most of the time you can request that no taxes be withheld and take all the money, but you still only have the 60-day timeframe to complete the rollover. Additionally, if you are under 59.5 and do not complete the rollover it will trigger the 10% early withdrawal penalty.

If you have any questions about a potential retirement account rollover, or you are interested in partnering with Laws Financial to perform a rollover, we are here to help.

Disclosures:

1) Securities and Advisory services offered through GWN Securities, Inc., Member FINRA/SIPC, a Registered Investment Advisor. 11440 N. Jog Road, Palm Beach Gardens, FL 33418. (561) 472-2700. Laws Financial, Inc. and GWN Securities, Inc. are separate companies.

2) A distribution from a Roth IRA is tax-free and penalty-free provided that the five-year aging requirement has been satisfied and one of the following conditions is met: age 59 1/2, death, disability

3) Information provided should not be considered as tax advice from GWN Securities, Inc. or it’s representatives. Please consult with your tax professional.