401(K) ROLLOVERS

A 401(k) rollover is the process of moving money from a former employer’s retirement plan into another eligible retirement account, such as a new employer’s 401(k) or an IRA. The main options are:

1. Direct rollover to a new employer’s 401(k)

● Funds move directly from the old plan to your new employer’s plan.

● Benefits: Keeps retirement savings tax-deferred, may simplify management, and can preserve access to certain plan features, such as loans or institutional investment options.

● Potential drawbacks: The new plan may have higher fees, fewer investment choices, or less favorable features than the old plan.

2. Direct rollover to a traditional IRA

● Funds are transferred directly to a traditional IRA without being paid to you.

● Benefits: Often provides a broader range of investment choices and may offer greater control over fees and account management.

● Potential drawbacks: You may lose access to employer-plan features, such as loans. A large IRA balance can also complicate future backdoor Roth IRA contributions because of the pro rata rule.

3. Rollover to a Roth IRA

● Pretax 401(k) funds are moved into a Roth IRA and generally treated as taxable income in the year of the conversion.

● Benefits: Future qualified withdrawals can be tax-free, and Roth IRAs do not require lifetime required minimum distributions for the original owner.

● Potential drawbacks: The upfront tax bill can be substantial, and converting during a high-income year may increase your tax rate.

4. Leave the money in the former employer’s 401(k)

● You may be able to keep the account where it is, depending on the plan’s rules and your balance.

● Benefits: You avoid triggering taxes, retain the plan’s investment options, and may benefit from federal creditor protections that can be stronger than those for IRAs.

● Potential drawbacks: You may have limited investment choices, higher fees, or multiple accounts to manage. You also generally cannot make new contributions.

5. Take a cash distribution

● You withdraw the money instead of rolling it into another retirement account.

● Benefits: Provides immediate access to funds.

● Potential drawbacks: Pretax amounts are generally subject to ordinary income tax, and withdrawals before age 59½ may incur a 10% early-distribution penalty unless an exception applies. Taking cash also permanently reduces tax-advantaged retirement savings.

Important rollover considerations

● Use a direct trustee-to-trustee transfer whenever possible. If the distribution is paid to you, the plan may withhold 20% for federal taxes, and you generally have 60 days to deposit the full amount into another eligible account to avoid taxation. You would need to replace the withheld amount from other funds.

● Confirm whether the plan contains Roth 401(k) contributions, after-tax contributions, company stock, or other special assets. These may require different handling.

● Compare investment expenses, administrative fees, services, creditor protections, and withdrawal rules before choosing an account.

● Consider whether you may need access to the money before retirement, whether you want to make backdoor Roth IRA contributions, and whether you value the simplicity of consolidating accounts.

● Required minimum distribution rules, beneficiary designations, and state tax treatment can also affect the decision.

● Tax rules are complex and can change. Consider consulting a qualified tax or financial professional before completing a rollover..