What are My 401(k) Rollover Options? Read This for Some Need-to-Know Facts

What are My 401(k) Rollover Options? Read This for Some Need-to-Know Facts

Retirement planning involves many decisions. For many retirement savers, an important question is what to do with their 401(k) retirement account. As they near retirement, investors must decide whether to leave the money within their account or choose another option, such as an IRA rollover.

The good news is Americans typically have six options for moving 401(k) assets around or leaving them alone. But not all of these possibilities may be appropriate, depending on the merits and downsides of a particular rollover option for your personal situation.

It’s also not unusual for an investor to have the lion’s share, or even a large bulk, of their retirement assets in a 401(k) plan account. So, whatever they do with these retirement assets, it’s a decision that will have tremendous implications for the future.

If you are mulling over 401(k) rollover options, be sure whoever you work with understands all the ins-and-outs of different rollover outcomes. Your financial professional should clearly explain the positives, negatives, and details of each rollover option to you. They should go over how it may help or hurt your personal situation.

Weighing 401(k) Rollover Options Carefully

After all, this is your future at stake – one mistake can be costly, and once made, some 401(k) rollover errors are irreversible. Make sure you choose wisely and you are well-informed of each possibility before you decide.

In the meantime, if the question of “what are my 401(k) rollover options?” is a pressing matter for you, here’s a quick post which goes over some important factors to consider.

Read on for some 401(k) rollover basics to start with making an informed decision. And as we emphasized before, make sure to work with a qualified professional for any 401(k) rollover considerations.

What are Some Reasons for 401(k) Rollover?

Before discussing the various 401(k) rollover options, let’s go over some of the reasons why people explore 401(k) rollover options. It’s never prudent to pull up stakes in haste. What are some reasons that folks may think about this route?

According to different surveys, some of the reasons that working and retired Americans opt for 401(k) rollovers include:

  • Concerns about market volatility risk
  • Fees within a 401(k) plan
  • A perceived lack of personal financial guidance
  • Perception of too few or too many options in a 401(k) investment menu
  • Limited money access options
  • Potentially more options outside of current plan

On the other hand, sometimes people choose to leave money within their 401(k) accounts. These motivators may be for: continuing to receive “free money” from an employer match, being able to make lifetime contributions, or having shelter from creditors.

It’s also important to recognize that, even though it’s no longer in effect, the DOL fiduciary rule had an impact on the 401(k) rollover landscape. Now rollovers are subject to higher scrutiny.Ed Slott, nationally recognized as an IRA expert, has on his website some helpful insights on pre-DOL rollover advice conditions and, now, how things have changed.

What are 401(k) Rollover Options for Working Americans?

Now, let’s get more into what makes up your 401(k) rollover options. Generally speaking, there are six rollover possibilities at your disposal:

  • Rolling over 401(k) funds into an IRA – the most commonly used option
  • Keeping the funds in your existing company plan
  • Moving your 401(k) money to a new or alternative company plan (usually when you embark in a new job)
  • Opting for an in-plan Roth conversion
  • Converting 401(k)-held retirement savings to a Roth IRA
  • Taking a lump-sum distribution from your 401(k) account

Before your financial professional makes a recommendation for any 401(k) rollover, they should walk through your options, going over each one and all that is involved with each possibility. They shoud carefully go over the advantages and drawbacks of all individual rollover options, and explain how each one can impact your retirement situation and future.

401(k) Rollovers: Merits and Drawbacks

Your financial professional will need to clearly communicate the merits and drawbacks of each option. That way you understand all rollover scenarios well and can decide accordingly.

According to experts, there may be a variety of reasons for why a particular 401(k) rollover option may be in your “best interest” – say it’s an IRA rollover. For example, rolling over funds to an IRA can offer many upsides including:

  • More simplicity with an IRA than a 401(k), generally speaking
  • Possibly more access to your money over a 401(k) account
  • Possibly higher-quality estate planning options
  • More control over your money versus what a 401(k) offers
  • Possibly a greater diversity of investment and financial options
  • Ability to buy an annuity for greater retirement income certainty or other retirement objectives

However, an IRA rollover also presents disadvantages. Slott points out two potential downsides:

  • You may run into creditor protection troubles – 401(k) plan accounts tend to be protected by federal law guidelines (Employment Retirement Income Security Act, or ERISA protection), whereas IRAs tend to be protected by state laws.
  • You may be stuck with plan life insurance with your existing 401(k) company plan – if you switch your funds over to an IRA, you will not have the ability to get life insurance within the boundaries of your IRA.
  • You are age 55 or older and need access to your money, which can be done within the auspices of a 401(k) plan account. If you pull money out of an IRA before age 59.5, you may incur a 10% tax penalty on top of the income tax you will be required to pay on your withdrawn amount.

Much like with any financial decision, there is no one-size-fits-all solution for all consumer situations. Carefully go through the merits and downsides of each rollover option with a qualified professional, weigh each option accordingly, and then it’s a matter of deciding which is best for you.

What Factors Should be Considered with 401(k) Rollover Options?

Ed Slott’s staff recommends that financial professionals consider how a rollover recommendation (or a recommendation to not complete a rollover) may affect the following variables:

  • Available investment options
  • Fees
  • Tax implications – for example, the 10% early withdrawal penalty
  • Creditor protection
  • Required minimum distributions (which start at age 70.5)
  • Services given
  • Simplicity or convenience
  • Estate planning implications

As can be seen, there are many variables to consider with any rollover decision. Educate yourself, understand your options, and work with a qualified professional who can clearly walk you through all 401(k) rollover possibilities. Decide wisely, and you will have taken an important step toward financial security and peace of mind in your retirement years.

Get Help with Your Financial Retirement Planning

When it comes to retirement planning, two important benchmarks to plan for are monthly income and preservation of accumulated assets. You can receive personal help with planning for these markers in your post-work lifestyle. We invite you to connect with a retirement planning strategist and request a no-obligation, one-on-one meeting to discuss your specific retirement needs and objectives.

Use our Find a Financial Professional section to connect directly with an independent financial professional, and to request a personal strategy session to discuss your needs and goals. And should you have any questions or concerns, call 877.476.9723.

Ed Slott Article Source:

Copyright © 2017 Ed Slott and Company, LLC
Reprinted from The Slott Report, April 16, 2016, with permission.

Next Steps to Consider

  • Start a Conversation About Your Retirement What-Ifs

    retirement planning services next steps

    Start a Conversation About Your Retirement What-Ifs

    Already working with someone or thinking about getting help? Ask us about what is on your mind. Learn More

  • What Independent Guidance
    Does for You

    independent vs captive advice

    What Independent Guidance
    Does for You

    See how the crucial differences between independent and captive financial professionals add up. Learn More

  • Stories from Others
    Just Like You

    safe money working with us

    Stories from Others
    Just Like You

    Hear from others who had financial challenges, were looking for answers, and how we helped them find solutions. Learn More

Proud Member