If your employer offers a retirement plan as part of their benefits package, this will be the basis for your 401k rollover options. However, if your new employer offers a Simple IRA instead of a 401k rollover plan, your transfer options will be more limited. If this is the case, you’ll most likely either want to leave your 401k plan where it is or do a 401k rollover to a separate plan that you’ve set up on your own. You can do a 401k to Roth IRA rollover as well, but be aware that at least 20% of the funds will be held out for taxation. This is because Roth IRA funds are already taxed when they go into the IRA, but not when they’re removed.
There are plenty of common reasons to perform a 401k rollover – for example, if you’re leaving a job and want to move your funds to an account that you hold, a rollover will allow your 401k funds to leave with you. Alternatively, you may be disappointed with the performance of funds in an old 401k account and this could be enough to cause you to desire a change.
Once you’ve decided on your 401k rollover options and you know where the money is going to go, you’ll need to decide if you’re going to do a direct or an indirect transfer. The direct transfer is often viewed as the best option, as it’s done entirely between banks – there’s no middleman and no change in the tax status of your funds. However, if you do an indirect transfer, then a check for only 80% of your balance will be issued to you. You then have 60 days to put that money into a qualified account before the remaining 20% will be released. This is something you want to avoid, as it’s technically considered a cash distribution and can later cause problems with your 401k tax.
Unless you meet the qualifying age restrictions on withdrawing money from your 401k, you don’t want to risk taking out a cash distribution because of the 401k withdrawal penalty. If you’re under 59 ½ years old, then the money will be removed from the account with a 20% tax withholding and a 10% 401k withdrawal penalty attached to it. You may be able to recover some of the tax withholding when you file your taxes, but the ten percent penalty is something that will be forfeited forever.
Because of this, you’ll want to make sure that you complete a 401k rollover to either another 401k or IRA account. If you don’t have an account that’s provided by your employer, you’ll want to open a privately held account that will work for your financial needs. In order to do this, you’ll most likely want to consult with a financial advisor who can go over all of your 401k rollover options until you’re able to decide on the right one. The IRA or 401k plan that you choose should be one that will work for your retirement needs now and in the future.