You’ll keep all the money in one place, and you may be able to access some professional advice as part of your new plan, too. So a rollover to a new 401(k) is a winner for convenience. It’s a winner from a tax perspective, too, because you won’t incur any new taxes as long as you transfer to at your new employer.
In addition, having all your money in a 401(k) protects you from the pro-rata rule. This rule , which is a useful strategy if you earn too much to contribute directly to a Roth IRA. One downside, however, is that your new plan may not have particularly attractive investment choices, for example, offering expensive funds.
So you’ll want to consider your investment options, too.
2 Rollover into a traditional IRA
A rollover into a is another strong choice, because you’ll still enjoy substantial tax benefits. You’ll be able to defer taxes on any gains, and you can continue to add to your IRA, up to $6,000 annually (in 2022) and enjoy the tax breaks on any income you stash there.
comment
2 replies
A
Ava White 130 minutes ago
Another advantage is that you’re able to invest in whatever you want, so or . Some might see the f...
H
Harper Kim 133 minutes ago
If you opt for a traditional IRA, you’ll want to be careful that you make the transition exactly h...
Another advantage is that you’re able to invest in whatever you want, so or . Some might see the flexibility of a traditional IRA as a disadvantage, because it requires them to make investment decisions, and so many people will need the advice of a financial professional. But the traditional IRA has disadvantages, too, including required minimum distributions (RMDs) when you reach age 72 meaning you’ll have to withdraw money whether you want to or not.
If you opt for a traditional IRA, you’ll want to be careful that you make the transition exactly how you intended it. Money from a traditional 401(k) can go into a traditional IRA, but it could also go into a Roth IRA (see the next option). If you decide to move from a traditional 401(k) to a traditional IRA, you’ll avoid any immediate tax liability from the rollover.
comment
3 replies
A
Alexander Wang 103 minutes ago
But you’ll incur a tax liability if you move money from a traditional 401(k) to a Roth IRA.
3 ...
L
Lucas Martinez 67 minutes ago
It also offers attractive estate planning advantages and no RMDs. These are some of the reasons that...
But you’ll incur a tax liability if you move money from a traditional 401(k) to a Roth IRA.
3 Rollover and convert to a Roth IRA
Another option is to roll over your 401(k) into a . The Roth IRA provides enviable tax advantages such as never paying taxes on gains when the money is withdrawn in retirement.
comment
3 replies
J
Julia Zhang 12 minutes ago
It also offers attractive estate planning advantages and no RMDs. These are some of the reasons that...
J
Joseph Kim 15 minutes ago
If you move from this kind of 401(k) to a Roth IRA, you’ll be hit with taxes to compensate for the...
It also offers attractive estate planning advantages and no RMDs. These are some of the reasons that . If there’s any disadvantage to a rollover into a Roth IRA, it occurs if you have money in a traditional 401(k).
comment
3 replies
A
Andrew Wilson 6 minutes ago
If you move from this kind of 401(k) to a Roth IRA, you’ll be hit with taxes to compensate for the...
H
Harper Kim 17 minutes ago
This is also a popular maneuver as retirees near age 72 when the Roth 401(k) rules say that particip...
If you move from this kind of 401(k) to a Roth IRA, you’ll be hit with taxes to compensate for the taxes you’ve already deferred in the traditional 401(k). This burden, which can be quite high, is one reason that many workers move their money into a traditional IRA. If you have a Roth 401(k), you can roll over your money to a Roth IRA without creating extra taxes.
This is also a popular maneuver as retirees near age 72 when the Roth 401(k) rules say that participants have to begin taking RMDs. By switching to a Roth IRA, you can avoid this requirement entirely.
comment
1 replies
B
Brandon Kumar 5 minutes ago
However, many savers may have a traditional 401(k) that they’re not aware of. If you receive match...
However, many savers may have a traditional 401(k) that they’re not aware of. If you receive matching contributions from your employer, those contributions are put into a traditional 401(k), regardless of which kind of 401(k) you have. If you have a Roth 401(k) and receive an employer match, you’ll have to figure out how you want to deal with this extra traditional 401(k) account.
comment
3 replies
S
Scarlett Brown 63 minutes ago
This can help you tally up how much tax-free money you can amass.
4 Rollover into an annuity
S
Sofia Garcia 50 minutes ago
The advantages of an annuity are that it can provide stable income with a guaranteed return. When pa...
This can help you tally up how much tax-free money you can amass.
4 Rollover into an annuity
Another option is to roll your 401(k) into an annuity, which can still be held within the tax-friendly embrace of an IRA, helping you avoid taxes until they’re necessary.
The advantages of an annuity are that it can provide stable income with a guaranteed return. When participants tap the annuity, they can receive a regular pension-like income. Many savers like this security, and they don’t need to worry about investing their money, a process that some don’t want to handle.
comment
1 replies
A
Audrey Mueller 32 minutes ago
The downsides for an annuity include the relatively high sales commissions that can sometimes be hid...
The downsides for an annuity include the relatively high sales commissions that can sometimes be hidden in the sales contract. The types of annuity contracts can be incredibly complex, with all types of restrictions and caveats, depending on what the annuity company offers.
comment
3 replies
L
Lily Watson 94 minutes ago
Some annuities can be much more complex than others, depending on the features you need. Another dow...
E
Elijah Patel 46 minutes ago
Annuities divide many financial experts, . If this route appeals to you, speak with a fee-only finan...
Some annuities can be much more complex than others, depending on the features you need. Another downside is that once you buy the annuity, the money is typically locked in for some period, so it may not be readily accessible if you . If you’re still within the lock-up period, you’ll usually have to pay a hefty surrender fee to access your money.
Annuities divide many financial experts, . If this route appeals to you, speak with a fee-only financial adviser who is a fiduciary in order to access objective advice about whether an annuity is right for your situation. Many “advisers” are actually disguised salespeople, so beware.
Avoid taking the cash
When times get tough, it can be easy to see the cash in your retirement account and consider tapping that to help get you through. In fact, in a recent Bankrate survey, or planned to do so as a result of the coronavirus-related economic decline.
comment
1 replies
J
James Smith 47 minutes ago
Taking an early withdrawal comes with a heavy cost. If you take money out of a 401(k) before retirem...
Taking an early withdrawal comes with a heavy cost. If you take money out of a 401(k) before retirement age (59 ½), the IRS will hit you with a 10 percent bonus penalty on top of the taxes that you’ll already owe.
comment
2 replies
D
David Cohen 67 minutes ago
In addition, you may have to sell investments at low prices, and you’ll lose any potential appreci...
B
Brandon Kumar 69 minutes ago
.
What to consider when rolling over a 401 k
If you’re not required to move your money f...
In addition, you may have to sell investments at low prices, and you’ll lose any potential appreciation over your working years, hitting your nest egg still more. If you must tap your retirement account, see if your plan allows you to borrow against the money in the account. You’ll have to repay the funds, of course, but you may be able to avoid the taxes, which is a win in itself.
comment
1 replies
S
Sofia Garcia 26 minutes ago
.
What to consider when rolling over a 401 k
If you’re not required to move your money f...
.
What to consider when rolling over a 401 k
If you’re not required to move your money from your old 401(k) account, consider leaving the account open.
comment
2 replies
D
Dylan Patel 2 minutes ago
Ask yourself a few questions to see if you really do need to do a rollover: Does a new rollover acco...
W
William Brown 30 minutes ago
Do you value the convenience of having your money consolidated in one place? If so, it could make se...
Ask yourself a few questions to see if you really do need to do a rollover: Does a new rollover account offer valuable features such as greater investment options or cheaper funds? If so, it could make sense to roll over your account.
Do you value the convenience of having your money consolidated in one place? If so, it could make sense to roll over your 401(k).
comment
1 replies
L
Luna Park 65 minutes ago
If you roll over your 401(k) to an IRA, do you have the ability or resources to manage it yourself? ...
If you roll over your 401(k) to an IRA, do you have the ability or resources to manage it yourself? With an IRA you’ll have to manage your investments or hire someone to do it for you. If you’re not up to that job, it may make sense to stick with your current plan.
comment
3 replies
A
Andrew Wilson 132 minutes ago
If you roll over your 401(k) to an IRA (instead of another 401(k) plan), are you alright with losing...
C
Chloe Santos 96 minutes ago
Above all, try to avoid making an emotional decision in managing your money, such as doing a rollove...
If you roll over your 401(k) to an IRA (instead of another 401(k) plan), are you alright with losing some of the 401(k)’s benefits such as the ability to take out a loan? You’ll want to consider whether you need any special features of the 401(k) before you move it to an IRA. Those are some of the key issues you’ll want to consider as you’re considering a rollover.
comment
2 replies
A
Alexander Wang 38 minutes ago
Above all, try to avoid making an emotional decision in managing your money, such as doing a rollove...
H
Henry Schmidt 3 minutes ago
What is a required minimum distribution RMD
RMDs are withdrawals that retirement account...
Above all, try to avoid making an emotional decision in managing your money, such as doing a rollover simply to get away from your old employer. Instead, make the best money decision for you.
comment
3 replies
L
Luna Park 94 minutes ago
What is a required minimum distribution RMD
RMDs are withdrawals that retirement account...
S
Sophie Martin 90 minutes ago
Currently, the rule specifies that owners of these plans must take distributions beginning at age 72...
What is a required minimum distribution RMD
RMDs are withdrawals that retirement account owners are required to take after they retire. This rule applies to accounts such as traditional IRAs as well as to employer-sponsored retirement plans such as 401(k)s.
comment
3 replies
V
Victoria Lopez 2 minutes ago
Currently, the rule specifies that owners of these plans must take distributions beginning at age 72...
H
Harper Kim 140 minutes ago
After that, there will be penalties for not taking distributions. Once you begin taking RMDs, you ge...
Currently, the rule specifies that owners of these plans must take distributions beginning at age 72. However, you have until April 1 of the year following the year you turn 72 to start taking distributions. For instance, if you turn 72 in August of 2030, you have until April 1, 2031 to start taking distributions.
comment
1 replies
L
Lucas Martinez 99 minutes ago
After that, there will be penalties for not taking distributions. Once you begin taking RMDs, you ge...
After that, there will be penalties for not taking distributions. Once you begin taking RMDs, you generally have until Dec. 31 of the current year to take that year’s RMD.
comment
1 replies
C
Christopher Lee 229 minutes ago
There are also exceptions to this rule. Roth accounts are not subject to RMDs because you pay taxes ...
There are also exceptions to this rule. Roth accounts are not subject to RMDs because you pay taxes on contributions.
Also, you may not have to start taking RMDs if you are still working; generally, you can wait until you retire.
What is a direct rollover
A direct rollover is a distribution of assets from one plan into another.
For instance, you may request a rollover of the investments in your traditional 401(k) into a traditional IRA. The benefit of this approach is it allows you to maintain your investments without creating a taxable event. Plus, you can roll multiple old 401(k) plans into a rollover IRA, making them easier to manage.
As noted previously, while it is possible to move investments directly from a traditional 401(k) to a Roth IRA, there will be tax implications because the flow of money into the Roth IRA is considered a contribution. Hence, this option may not be worth it unless the benefits outweigh the costs. It’s also worth noting that direct rollovers have a deadline.
comment
2 replies
B
Brandon Kumar 132 minutes ago
If you opt for a direct rollover, the process must be completed within 60 days to avoid the possibil...
V
Victoria Lopez 17 minutes ago
Hence, if you prefer this option, be sure you can move the funds quickly into the new account when t...
If you opt for a direct rollover, the process must be completed within 60 days to avoid the possibility of penalties. This means the entire process of moving the funds from the old account into the new account must happen within 60 days. If the funds have been moved out of the first plan but are not yet deposited into the new account, you may be hit with penalties.
comment
3 replies
A
Ava White 112 minutes ago
Hence, if you prefer this option, be sure you can move the funds quickly into the new account when t...
N
Nathan Chen 211 minutes ago
Also key is avoiding tapping your retirement funds, if at all possible, because you’re stealing fr...
Hence, if you prefer this option, be sure you can move the funds quickly into the new account when the time comes. Also, you may want to ask your old plan provider how long it takes for them to move the money out so you know when it will be your turn to act.
Bottom line
Workers have a few 401(k) rollover options, but the best decision focuses on your financial situation, and the right rollover will differ from person to person.
comment
2 replies
C
Christopher Lee 247 minutes ago
Also key is avoiding tapping your retirement funds, if at all possible, because you’re stealing fr...
O
Oliver Taylor 194 minutes ago
Royal, Ph.D., covers investing and wealth management. His work has been cited by CNBC, the Washingto...
Also key is avoiding tapping your retirement funds, if at all possible, because you’re stealing from your financial future.
Learn more
— Bob Haegele contributed to an update of this story. SHARE: Bankrate senior reporter James F.
comment
3 replies
T
Thomas Anderson 27 minutes ago
Royal, Ph.D., covers investing and wealth management. His work has been cited by CNBC, the Washingto...
G
Grace Liu 135 minutes ago
Brian Beers is the managing editor for the Wealth team at Bankrate. He oversees editorial coverage o...
Royal, Ph.D., covers investing and wealth management. His work has been cited by CNBC, the Washington Post, The New York Times and more.
comment
2 replies
L
Lily Watson 98 minutes ago
Brian Beers is the managing editor for the Wealth team at Bankrate. He oversees editorial coverage o...
H
Harper Kim 74 minutes ago
Kenneth Chavis IV is a senior wealth manager who provides comprehensive financial planning, investme...
Brian Beers is the managing editor for the Wealth team at Bankrate. He oversees editorial coverage of banking, investing, the economy and all things money.
Kenneth Chavis IV is a senior wealth manager who provides comprehensive financial planning, investment management and tax planning services to business owners, equity compensated executives, engineers, medical doctors and entertainers.
Related Articles
comment
2 replies
S
Sofia Garcia 48 minutes ago
401(k) Rollover Options: Here’s What To Do If You Lose Or Change Your Job Bankrate Caret RightMai...
M
Mason Rodriguez 21 minutes ago
How We Make Money
The offers that appear on this site are from companies that compensate us...
