What’s involved in your 401K rollover when it happens? For the most part, a 401K rollover occurs at the time of retirement or when you change jobs. At that time you may choose to transfer (rollover) your 401K into an IRA. When you partake in this process of transferring your 401K funds from a previous employer into an IRA, then it’s called a ‘401K rollover’.
You can accomplish this by way of a ‘trustee to trustee’ transfer. This moves your 401K from where it is now directly into an IRA. These types of direct rollovers are totally tax-free and you’re not held to any tax liabilities. You also have no limit on the amount of cash you can rollover. It’s very important that you choose wisely when making this move from a former employer with your money, as this usually involves quite a substantial amount for most people.
One of your available options, is to take your money in cash. This is viewed by most as the absolute worst decision, mainly due to the fact that it involves a lot of crucial tax consequence. It’s a requirement that your former employer hold out a solid 20% of your money for federal taxes, and your cash is going to be taxed just like regular income. From here, they start coming at you from all directions.
There’s always the possibility that you’ll owe even more than the 20%, depending on what tax bracket you fall under. And if you’re under the age of 59, there may be even additional fees involved. You may even turn out to owe more than the initial 20% that was held out for that year. It can definitely go from bad to worse, and these are just a few of the reasons that the cash option if frowned upon. So, just like the 401k contribution limits it’s significant to follow the rules that are in place.
You have the option to leave the money right where it is, with your old retirement plan with your old employer. There are quite a few reasons why this is much better option than the first one of taking the cash. No penalties and no taxes, but not altogether without some drawbacks. It can get very confusing once you begin to try to keep up with and manage different retirement accounts from previous plans. This can cause you to suffer in the light of investment performance. Proper diversity is a major key in investing.
You can transfer your money into your new employers plan, as most of them will allow you to do so. This will save you the headache of balancing too many accounts with too many different figures to be kept up with. By just having one account to deal with, managing it becomes much more simple and easy to do.
By taking your cash and rolling it over into an IRA account, you will solve the problem of having no kind of professional advice concerning your investments. It’s very likely that you weren’t receiving any type of guidance with your old 401K. But once you roll over to an IRA account, you’ll get a BCM financial advisor to help with choosing a diversified portfolio for your investing.
It’s good to know what’s involved in your 401K rollover. If you transfer the cash into a rollover IRA, then you will have chosen the most popular option. By doing this, you increase the amount of control you have over your money, as well as easier management, and an increase in flexibility and the ability to get good sound advice for your investing.