Chapin & Irmo 401K Rollover Experts
What is a 401K Rollover?
When you are planning to retire or looking for a new job, it is inevitable to make a decision about your employer-sponsored 401K plan. The plan involves money and, thus, require a wise decision from you. You have to understand that when you retire or leave for your new job you also leave the plan in you previous employer. Well, that is if you allow that to happen.
On the other hand, you have other better options such as the transfer of some or all of the money or savings in your 401K plan to another account. You can rollover or transfer the balance to another individual retirement account or to the 401K plan of your new employer. You can do this without having the money taxed. For many, the best option is to rollover their 401K into a specific type of IRA.
To help you out, there are three major types of 401K rollovers. These are:
- 401K to Roth IRA
In this type, you will be required to pay taxes for the amount rolled because it is categorized as a Roth conversion. However, there are exceptions. One specific exception is when the account being rolled over is Roth 401K.
- 401K to Traditional IRA
Rolling over your 401K account balance to a traditional IRA will allow you to keep your money deferred from tax. In addition, you will also be offered with more options when it comes to investment. What is even greater is that these options may have lower fees.
- Old 401K to 401K with the new employer
For people who want to keep their funds in a single account, this type of rollover is the most sensible choice. Another reason for others to choose this is if the new employer offers a plan that has low cost options for investment. To smoothly implement this type of rollover, it is necessary to contact the administrator of your current 401K plan to know about the specific instructions.
Do you need to rollover your 401K?
The most common choice for a 401K rollover is to transfer the balance to an IRA. However, is it important to rollover your 401K account? It depends on several factors. When you rollover to an IRA, there are benefits that you can enjoy. These include:
- Selection of large investment
Typically, there are about 20 to 25 investment selection in a 401K plan. But when you shift to an IRA, you will be presented with a range of options for investment. These include mutual funds, bonds, index funds, exchange-traded funds, and stocks.
2. When there is a wider selection of investment, there is also an opportunity for you to shop around easily. This is particularly helpful when purchasing funds and you are looking for low expense ratios.
3. Lower fees
It is a good thing that there are providers of IRA that don’t charge fees when an individual wants to maintain his or her account. However, 401K is a different case. Participants are usually charged with administrative fees.
What are the disadvantages when you don’t rollover?
If you think it is safe and problem free when you choose to not rollover your account, you are not thinking wisely. Initially, it looks very simple and easy if you just opt to cash out your money. It is true but you have to note that it is also costly. Once you ask for a check from your plan administrator, expect that your employer will make sure to withhold around 20% of the balance in your account. This is done to make sure that there is funds for the pre-pay of the taxes you have to pay.
In addition, your early payout can even be categorized as an early distribution based on the standards of the IRS. When this happens, it only means that you could possibly owe the early withdrawal penalty amounting to 10%. Add to this the combined local, state and federal taxes. When all of the deductions are accounted for, the total could reach as high as 50% of your total account balance. That is too high especially if you think of the total amount of your account balance. This is the reason why many are choosing to rollover their 401K plan to any type of IRA.
With all these, it is definitely far wiser and more practical to rollover your 401K plan to whatever choice you want. It can be any type of IRA or a Roth 401K account. Whatever your choice is, you’ll definitely enjoy a bigger portion of your current account value. Contact us for a free consultation!