By Jason Cohen, CFP®
When it comes to preparing for retirement, the 401(k) remains one of the most powerful tools available. But like any tool, its value depends on how well it’s managed and whether it continues to serve your needs as your circumstances change.
When you change jobs, for example, what happens to the money in your 401(k)? The days of spending an entire career with a single employer are largely behind us; on average, today’s working adults change jobs at least 12 times throughout their careers. With each transition, you’ll likely need to decide what to do with the retirement savings you’ve accumulated.
A 401(k) rollover can be a smart way to keep your retirement strategy on track. Consolidating old accounts may help reduce fees, simplify your portfolio, and give you access to a wider range of investment options. Most importantly, it allows you to align your retirement savings with your current goals and long-term plan.
If you’re considering a rollover, now is a good time to explore the fundamentals and determine the best next steps based on your individual financial picture.
A 401(k) rollover is an option you have when you leave a company and want to transfer your investments into an individual retirement account (IRA). Normally people do this if they are leaving a company, switching to a new company, or retiring, but you can also do a 401(k) rollover into another 401(k) with a new employer.
The main benefits of a rollover from a 401(k) to an IRA are the following:
Some potential cons of a 401(k) rollover include:
Tax-deferred retirement plans are subject to required minimum distributions (RMDs). Taxes are due at the time of withdrawal. The SECURE Act changed the timeline for taking RMDs for both IRAs and 401(k) plans. For IRAs, anyone who reached age 70½ on or after January 1, 2020, will not be required to begin taking RMDs until April 1st of the year after they reach age 73. (Under the SECURE 2.0 Act, that RMD age will rise to 75 in 2033.) Failure to take RMDs at the appropriate time will result in a hefty 50% penalty on any distributions you fail to take on time.
Some 401(k) plans (but not all) allow you to leave money in the plan until you retire, effectively delaying RMDs, as long as you are still working for the employer who sponsored your 401(k) plan. If you leave any 401(k) funds in your prior employer’s account, the exception will not apply to those funds. The exception also does not apply to IRAs; if you have funds in an IRA, you must start taking RMDs when you reach the age limits regardless of when you retire.
Both IRAs and 401(k)s include a 10% penalty if you withdraw money before the age of 59½. The 10% penalty is in addition to taxes that you will owe on the money no matter what. There is one exception for 401(k) plans, known as the Rule of 55; if you retire at 55 or later, you can take penalty-free withdrawals from your current 401(k) sponsored retirement plan. The Rule of 55 does not apply to IRAs, nor does it apply to 401(k) plans still housed in a prior employer’s account.
Thankfully, rollovers are fairly simple. Once you have chosen a bank, financial institution, or online investing platform, you contact your 401(k) plan administrator to let them know where you want your funds transferred. You can choose to do either a direct or indirect rollover. A direct transfer is generally recommended because it is the simplest form of getting money from one point to the next, and you do not have to worry about how or when to deposit funds.
You also have the option of doing an “indirect rollover,” where your employer cuts you a check and you are responsible for depositing the funds into a new tax-deferred investment account within 60 days. Your employer will be required to withhold 20% of the funds to pay taxes due (this 20% comes back to you in the form of a tax credit when you file your return). That means you will only receive a check for 80% of the value of your 401(k), and you will need to replace the 20% withheld amount from your personal funds or another source. If you fail to deposit the funds to a tax-deferred account within 60 days, the transfer will be treated as an early withdrawal and the entire amount will be subject to an additional 10% penalty.
Tools are designed to help reduce complexity and improve efficiency, and your 401(k) is no exception. While rollover options offer flexibility, determining the best course of action can be challenging. There’s no universal solution, as each individual’s financial circumstances and goals are different.
Before making any decisions, it’s wise to speak with a qualified financial professional. At Wealth Advocate Group, we take the time to understand your specific situation and provide clear, personalized guidance. Together, we’ll assess whether a 401(k) rollover aligns with your long-term retirement strategy and build a tailored plan to support your financial future.
Our goal is to make complex financial topics approachable so you can move forward with clarity and confidence. To begin the conversation, contact us at 440-505-5751 or email jcohen@Wadvocate.com to schedule an appointment.
Jason Cohen is Chief Operating Officer and wealth advisor at Wealth Advocate Group, LLC, an independent, fee-based wealth management company. Jason has 15 years of experience and spends his days managing firm operations, including portfolio trading and analysis, training of new advisors, financial plan production, and client relationship management. Jason specializes in serving real estate professionals and other independent contractor business owners, helping them navigate their unique financial challenges, such as unpredictable cash flow and tax issues, so they can pursue financial independence. Jason has a bachelor’s degree in public management from Indiana University and is a CERTIFIED FINANCIAL PLANNER® professional and believes that everyone should have access to comprehensive financial planning. He is passionate about doing his best for his clients and setting others up for success. Outside of the office, you can find Jason staying active in a variety of sports and spending time with friends and family. Learn more about Jason by connecting with him on LinkedIn.
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This information is not intended to be a substitute for specific individualized tax advice. We suggest you discuss your specific tax issues with a qualified tax advisor.
