A Direct Rollover From Your 401k to IRA is Usually the Wisest Decision.
Recently switched jobs or retired? Congratulations! You now have an opportunity to take control of your retirement destiny by employing the 401k rollover process. A direct rollover from your 401k to IRA is usually the wisest decision, and when done correctly, has no negative tax implications.
Your 401k, 403b, pension and other retirement savings programs are among the most powerful benefits you will receive from your employer. In today’s marketplace employees rarely stick with one employer for their entire career. In fact, many of today’s workers will have more than 10 employers throughout their working years. Today’s transient workforce results in many “old” 401k and retirement accounts remaining in former employers’ plans.
Below are some pros and cons for three of the more common options 401k plan participants have when considering what to do with the retirement assets they’ve accumulated in their former employer’s retirement plan:
Direct Rollover to an IRA
A direct rollover from your 401k to an IRA is also referred to as a 401k rollover IRA. Rolling over your 401k or other retirement account to an IRA Rollover is usually the best decision for a number of reasons. 1) No negative tax implications. 2) You are no longer limited to the investment choices offered through your prior employer’s plan. Once your funds are in an IRA, you can invest in what’s in your best interest. 3) You can obtain adequate diversification that may not be possible through your former employer’s plan. This is especially important if you have a high concentration of assets in your former employer’s company stock. 4) You have total control of your account and can place the funds with whatever qualified custodian is the most convenient for you.
The 401k rollover to IRA process will usually entail the following steps: (1) request an application for benefit or distribution request form from your former employer or the record keeper for your former employer’s plan; (2) complete and sign the form and return it to your former employer; (3) your former employer will review and sign-off on the form and forward it on to the custodian of the 401k plan assets; (4) the custodian will process the distribution request and deliver your vested account balance either directly to the custodian of your IRA rollover or directly to you in the form of a check that is made payable to your IRA rollover custodian. The exact process you will go through to fund your 401k rollover IRA will vary based on the plan and where the assets are held, so be sure to check with your former employer’s human resources department for specific instructions on how to process your 401k rollover.
Direct Rollover to your Current Employer’s Retirement Plan
Rolling over your 401k to your current employer’s plan is sometimes a viable option, because like when you rollover your funds to an IRA, there are no negative tax implications. Some plans allow you to borrow your 401k savings, although, it is usually not a wise decision to take a loan from your 401k. Obtaining a loan from your account would only be available if you rollover your old 401k account into your current employer’s plan and the current plan has a loan provision. Another advantage of rolling over funds from your old plan into your current plan is that you consolidate funds and have one less account to keep track of. A significant disadvantage to rolling over your funds into your current employer’s plan is that you are limited to the investment options that are available through the plan. If you are considering rolling over dollars from your old 401k into your new employer’s plan, you should contact your new employer’s human resources department to ensure the plan has a rollover provision that would allow such a rollover.
Lump Sum Distribution
Taking the funds out of your former employer’s 401k account directly and not rolling them over to an IRA or another qualified plan is rarely the best option. The amount of your distribution will be reported to you as taxable income. What’s more, if you are under age 59 ½ you may be subject to additional penalties. The advantage of taking a direct distribution is that you have immediate access to your money, albeit at a steep cost of losing tax deferred tax status, and creating a taxable event and possible penalty situation.
As a general rule, 401k plan participants would like to keep their funds in a tax deferred environment for as long as possible. Unfortunately, many 401k participants do not directly rollover their 401k accounts, which usually results in less of a chance they will enjoy a financially secure retirement.
All 401k plan participants should capitalize on this incredibly powerful retirement savings vehicle the IRS and their employer has made available to them. Don’t make the mistake of cashing-out your 401k account after you have switched jobs or retired. When possible, obtain the advice of a professional that will help you to grow and protect your retirement assets.
Please complete our online form on the left side of this page for more information on rolling over your retirement savings. There is never a fee or obligation for us to get to know each other and to discuss your rollover options. Our clients tell us we are a refreshing alternative to the typical aggressive commission driven salespeople in our industry. We don’t sell anything. Our only goal is for you to make wise decisions regarding the retirement savings you have worked so hard to accumulate.
Related Option: 401k Rollovers: Why a Rollover is Likely Your Best Choice
See Also: What is The 401k Advantage™?
Disclosure Statement: The contents of this website are for informational purposes only and are not a solicitation to either buy or sell securities. No new account will be accepted unless and until all local regulations have been satisfied. The material presented on this website is from sources believed to be reliable, but it's content is not guaranteed and may be subject to change at any time. Please read our privacy policy prior to leaving this site. Northwest Advisory Group, Inc. does not offer guaranteed rate programs. Investing in financial markets involve the risk of losing principal. Northwest Advisory Group, Inc. does not manage bank guarantee or FDIC accounts. All visitors to this website should note that past performance is not necessarily indicative of future results.