A 401(k) rollover is a way to safeguard your retirement account money as you transition from one employer to another.
The 401(k) money that you have invested with your current employer is yours to keep, and it is both you and your former company’s responsibility to make sure the assets move with you.
If you are entirely new to retirement investing, please learn about the 401k and then return to this page for more help on this topic.
Two Options for Rolling Over Your 401k
1. Take the option for a lump sum payout from your current account
Unless you are facing extreme financial pressure and need immediate access to cash, you do not want to go with this option.
The reason is that the 401(k) any withdrawals before the age of 59 ½ are subject to an immediate 10% penalty along with the full income tax liability for the withdrawn amount
There are a few exceptions where the 10% penalty is not applied such as hardship withdrawals which include medical expenses, college tuition, prevent foreclosure eviction from your primary residence.
One other exception to the penalty is if you are over the age of 55 and have left your place of employment and are planning to use the 401(k) money as part of your retirement plan. In this particular case, you have to schedule fixed installment payouts from the total value of the account over the length of your remaining lifetime.
2. Transfer the money to your new employer account – direct rollover or to an IRA account – IRA rollover
The direct rollover allows you take the assets of the 401(k) account from your previous employer and transfer it to the 401(k) account with your new company.
The easiest and safest way to accomplish this is to have the brokerage firm from your new company reach out to the old and arrange an electronic transfer.
The more risky method is to take a lump sum payout from your old company 401(k) account as a check and then transfer it to your new 401(k) and or an existing IRA account (read more on this below).
Besides losing or misplacing the check( you would be kicking yourself forever!), the risk is that you would only have an IRS imposed 60-day limit to deposit the amount into a new or existing retirement account. Otherwise, the IRS views this a payout and will subject you to the 10% penalty as well as the full income tax liability on the total value of the account.
The other option is the IRA rollover, which allows you to transfer your 401(k) into an IRA account without facing any of the income tax or early withdrawal penalties.
In this case, you will have to have an IRA account set up with a trustee, bank, brokerage firm, mutual fund company, etc. before completing the rollover. Your IRA manager can facilitate an electronic transfer between the two accounts.
Keep in mind that an IRA account is not the same as a Roth IRA account – they are two very different families and therefore follow different rules. For example, while it is possible to transfer money from an IRA account back to a 401(k) account with a new company, it is not possible to do the same with a ROTH IRA account.
The IRS has made options available to you to make sure you do not lose the money you’ve invested for your retirement. Directly rolling over the 401(k) assets from your old company to the new or transferring them over to a traditional IRA account.
Both options should be considered based on the advantages and disadvantages that each type of plan provides.