401(k) Rollovers and Other Options You Should Know About
Whether you are retiring or switching jobs, understanding how to manage your 401(k) is important. A 401(k) is a retirement savings account sponsored by your employer that offers you a tax benefit to save. While you put money in, your taxable income is reduced. But, when it comes time to withdraw that money, there are stipulations that may cost you. You can manage this account in several ways: by leaving it alone, withdrawals, reinvestments, and 401(k) rollovers. Depending on your situation, a 401(k) rollover may benefit you more than other options.
If you’re changing jobs before age 59½ and considering taking some or all the money from your 401(k), you may want to reconsider. You will face a 10 percent early withdrawal penalty. If you are retiring and planning to draw a lump sum from your 401(k), be aware that you will be taxed on the sum as if it was income. Because of these 401(k) policies, there are several different ways to manage your 401(k). Keep in mind that an option for managing your 401(k) may be to roll it over into another account or investment.
Your 401(k) Account Options
1. You can leave it where it is.
If you switch jobs, your 401(k) can stay where it is with your previous company. You do not lose your dollars. While this may seem like the simplest management option, the downside is that you can no longer contribute to this account. If your new job offers 401(k) investments, you’ll begin to contribute in an additional location. But, keeping up with retirement accounts in multiple places can get complicated!
2. You can cash out.
Immediate access to your money may be important to you. But there are policies and penalties for cashing out early – or at all. Here’s what you need to know:
- If you’re changing jobs before age 59½ and considering taking some or all the money from your 401(k), you will face a 10 percent early withdrawal penalty. This may still be a good decision, but be sure that moving your money will give you a better return to compensate for the penalty.
- If you’re 59½ or over and are retiring, you can plan to draw a lump sum from your 401(k). After all, one of the main reasons to invest in your 401(k) is so that you have income in retirement! However, because 401(k) investments throughout your career are not taxed, this lump sum withdrawal will be taxed once you take it as if it was income. This could result in less dollars in hand than you may expect.
3. You can roll it to a new 401(k).
This is another strategy if you are changing jobs, as long as you like the investment options of your new account. Simply roll your 401(k) balance from your old account into your new account. A benefit of a 401(k) rollover approach is that you can continue to invest tax-free in one place – making management of your money and planning for retirement easier.
4. You can roll it into an IRA.
An IRA is an Individual Retirement Account that offers similar benefits of a 401(k).
- IRAs are not tied to an employer and can be used in addition to a 401k account. Because they are not sponsored by employers, there are no employer-match benefits to an IRA. However, unlike a 401(k), you do not have to worry about what to do with this account should you change jobs.
- Like 401(k) rollovers, rolling your investment into an IRA provides one location to manage.
- IRAs may provide a wider range of investment opportunities than your employer-sponsored 401(k).
5. You can roll it into an annuity.
If you’re planning to retire early, rolling some or all of your 401(k) into an annuity tax-free could be a smart strategy. If you decide to retire at age 52, you will have to wait 7½ years before you can tap into your 401(k) funds, and 10 years before receiving social security benefits. An annuity would allow you to receive a monthly income for a set amount of time, making up for those years you would otherwise be without income.
401(k) Rollovers: What’s next?
There are two things you need to do to rollover your 401(k). The first is contacting your plan administrator, and the second is choosing which rollover option you want to use.
If you choose to roll it into another 401(k) account an IRA or an annuity, you will need to have those accounts set up before your plan administrator will be able to move your retirement funds.
If you’re actively saving and keeping up with your retirement accounts, you are already on the right track to be ready for retirement.
While you are in the process of rolling over your 401(k), take time to assess if your savings are enough to last in retirement and see if you need to work to boost your retirement account.
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Mutual of Omaha Investor Services, Inc. and its representatives do not provide tax or legal advice; therefore, it is important to coordinate with your tax or legal advisor regarding your specific situation.
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