401k Rollover Rules and IRS Rollover Chart

Derek Notman, CFP |

Should you transfer your 401k to an IRA?

As a CFP® Professional, I am asked quite often by people about 401k rollover rules, what they are, and if they transfer their 401k to an IRA.  Before deciding to do a rollover you should first educate yourself on your options with the IRS rollover chart so you can make an informed decision.  Then find a financial professional to help figure out if a rollover is right for you.

Here is a clear and simple explanation of what a 401k rollover is and what your options are when you leave or retire from your job.  Do you leave it there or transfer your 401k to an IRA? 

According to FINRA, people have 4 choices for a 401k rollover:

  • Leave the money in your former employer’s plan
  • Rollover the money to your new employer’s plan, if the plan accepts transfers
  • Rollover the money into an individual retirement account (IRA)
  • Take the cash value of your account

Before elaborating on each of these, check out this IRA Rollover Chart from the IRS to see what and where you can do rollovers.

IRS Rollover Chart

IRS Rollover Chart

1.  Leave the money in your former employer’s plan:

When considering this option think about the performance, fees and flexibility you have with your old account.  A lot of times when you change jobs or retire there are restrictions placed on what you can and can’t do if you leave your money in the old plan.  Will you be able to make investment allocation changes?  What if you need to take some money out, how easy will it be?  Or if you pass away, how much of a hassle will it be for your beneficiaries?  Also keep in mind that if your account balance is too low you may be forced to take it out of the plan.

 

2.  Rollover the money to your new employer’s plan, if the plan accepts it:

If you have started working somewhere else you might be able to roll your old account into the new one.  But, you will need to check to see if the new plan allows it.  If it does then will that money be given the same options as new contributions from your paycheck?  How many investment choices does the new plan offer?  What are the new fees?  If you did this and then decided you didn’t like the new plan would you be allowed to roll over the money again to an IRA?

 

3.  Rollover the money into an individual retirement account (IRA):

Quite arguably the most popular choice for people changing jobs or retiring is to rollover their 401k, 403b, 457, pension, etc. to an Individual Retirement Account (IRA).  This option tends to give you the most control over investment options, fee structures, and having an advisor help you with managing your money.  If you are considering this as an option make sure to get all the details in writing first and then see if it makes sense compared to your other options.  One of the benefits of an IRA is that you can get much more personalized help from your adviser, preferably a CFP® Professional, than you can from any of the other options. 

 

4.  Take the cash value of your 401k Retirement account:

A much less popular option is to just take a lump sum distribution when you change jobs or retire.  This tends not to be a great idea; however it can make sense to do if your financial situation calls for it.  By taking a lump sum distribution you will be potentially liable for taxes on the entire sum and even an IRS 10% penalty if you are under age 59 ½ .  Make sure to consult with a tax professional before electing to do this.

 

What to do next?

So, which option is best for you?  Well, as the saying goes, “it depends”.  Each client's financial situation is different and should be looked at in an individual manner.  No matter your situation, educate yourself first on the options above and how they will impact your situation.  Once you are informed you can call your 401(k) providers or engage a professional to help you through the rollover process.

A good place to start is to get an analysis done of your current portfolio to get a better idea of how it is invested and what the fees are, you will then have a good baseline established while doing your due diligence.

Cheers,

Derek Notman

Before rolling over the proceeds of your retirement plan to an Individual Retirement Account (IRA) or annuity, consider whether you would benefit from other possible options such as leaving the funds in your current plan or transferring them into a new employer’s plan.  Consult with each employer’s Human Resources Department to learn about important plan features and rules.  Be sure to compare the fees and expenses of each plan and investment option to those of any other investments that you are considering.  Review plan documents and the IRA agreement, as well as the prospectuses for plan investment options and any other investments that you are considering.  Your registered representative can help explain any new product being offered.  Neither Intrepid Wealth Partners, Eagle Strategies LLC nor its representatives or affiliates provide tax or legal advice.   Consult with a tax or legal advisor to discuss any questions or concerns that you have, such as the tax consequences of withdrawing funds or removing shares of an employer’s stock from a retirement plan and whether money invested in a retirement plan receives greater protection from creditors and legal judgments in your state than money invested in an IRA or annuity.  Also consider that you may be able to take taxable, but penalty-free withdrawals from an employer-sponsored retirement plan between the ages of 55 and 59.5 that you would not be able to take if you invest in an IRA or annuity.  Additionally, if you plan to work after you reach age 70.5, you may not be required to take minimum distributions from your current employer’s retirement plan but would be required to do so for funds invested in an IRA or annuity.