When you leave your current employer, whether it be for retirement or because you don’t have a choice, you will want to make sure you gather up all relevant information regarding your 401K. This is important because you will want to figure out all of the 401K rollover options available for you.
Here are some popular 401K rollover options you may want to consider when the time comes.
Direct Rollover Into an IRA
The easiest and most efficient way to avoid any federal and state withholding taxes is to directly roll your 401K over into an IRA. Directly rolling over into an IRA will also allow you to dodge a possible 10% penalty. Since an IRA is a “tax-deferred” account, your money will still be allowed to accumulate more rapidly than if you were to place it in a nonexempt account. This is probably the most popular of all the rollover options.
Taxable Distribution
This is also a very popular choice when it comes to rollover options. However, you will want to consider these things if you are leaning toward this 401K rollover option:
- Both federal and state taxes will take a big chunk out of the distribution.
- There is a 20% mandatory federal income withholding tax applied to all eligible rollover distributions.
- In some cases, an extra 10% penalty may be applied.
Let’s use the simplest layout possible so it is easiest to understand. If you have $100,000, you can expect to end up with somewhere around $80,000 or less if you use this option.
Transfer Funds to New Employer’s Plan
This is an excellent option if your new employer allows this. You will be able to avoid all current taxes, as well as the 20% withholding tax that can take a serious cut out of your retirement plan. If this is available to you, then you should definitely look into pursuing it.
Keep Funds in Old Employer’s Plan
This is an option to consider if your current account is valued at $5,000 or more. An old employer may allow you to keep your current funds in the account without moving them. Your old employer will not contribute to the account anymore, but it will continue to grow tax-deferred.
These are some options to consider when it comes time to rollover your 401K plan. The one you choose will be based on your situation and what you are currently facing. Knowing about the options above should help make your decision a little easier.
