If you are leaving one job for another, you want to ensure your 401(k) account continues to grow. When it comes to rolling over your funds, you have options. The key is to avoid common 401(k) rollover mistakes. Do your research to choose a plan that is best for you and follow all the proper steps, so you don’t get hit with a big tax bill or lose out on income growth, according to Fidelity.
To a certain extent, your age factors into what you choose to do. Cashing out a retirement account if you are under 59 1/2 (the minimum age for withdrawal established by the IRS) usually is not a good idea. If you close the account and take the money, you will have to pay income taxes and potentially a 10% early withdrawal penalty, significantly reducing the amount of money with which you will walk away.
Meeting with a financial professional to avoid any 401(k) rollover mistakes and ensure you pick the right solution can be helpful.
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In some cases, you can leave the money in your former employer’s plan, but that may not be the best choice. The money continues to grow, but there are limits to accessing the account. You can no longer deposit money into the account, and if you want to withdraw money, it may have to be the full amount. Plus, not all companies are open to former employees leaving money behind.
Consider rolling over your 401(k) into your new employer’s 401(k) or individual retirement account (IRA). This way you can build on what you already have. If you leave the job when you are age 55 or older, you can make withdrawals without paying any penalties, Fidelity noted.
Not all companies allow you to roll over your 401(k) into another plan. If it’s permitted and you opt for this, make sure you understand your new plan’s regulations and investment choices.
Not Considering an Annuity
Not investigating rolling your money into an annuity can be a mistake. You risk losing out on a more stable savings plan. You can roll over your 401(k) into an income annuity, which is a financial product designed to provide an income stream for a specified period, typically for the duration of a person’s life. Investors can either contribute a lump sum or pay into it over time – like a savings plan – and, in return, gain an income source immediately or for the future, usually when they retire.
“Among the benefits of rolling your 401(k) over to an annuity is it provides you and your family with a more secure retirement savings option while managing the risk of loss from market fluctuations,” said Christopher Perrier, a life insurance and annuity manager for AAA Northeast. “This can serve as a guaranteed income stream for the remainder of your life.”
Talk to a AAA insurance specialist to learn the best way to roll over your 401(k) into an income annuity.
Rolling Into an IRA Without Weighing Perks and Drawbacks
Rolling over a 401(k) to a rollover IRA, may sound easy, but that could be a mistake as well. Among the drawbacks: Investments through IRAs could be more expensive and the federal government offers more protections for 401(k)s than IRAs. Although some states offer additional protections for IRAs, according to Fidelity.
When you are 73 years old, unless you were born in 1960 or after, you will have to take required minimum distributions (RMDs) annually from the IRA account, even if you have continued to work. You won’t pay taxes or a penalty for moving the money, though, and it is still a tax-deferred account. You can also move the money to a traditional IRA, either existing or new.
Wherever you choose to transfer your money, remember to follow up to ensure there are no 401(k) rollover mistakes and that the transfer is completed. Transactions can be delayed for any number of reasons, and you want to be certain you know where your money is.
Learn more about AAA annuity products.
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“Investments through IRAs could be more expensive” is bad advice. All of the 401(k) plans that I was involved in invested in funds with substantial loads: i.e., fund management took .75% to 1.5% off the top every year. (I assume this was because the 401(k) management got a kickback to cover their expenses; the only low-load fund my last plan offered came with a surcharge.) Several investment firms support extremely low-load index funds (~0.1%) that let you keep almost all of your gains+earnings; look at what’s available before choosing a firm to set up a rollover IRA, and you’re likely to wind up much better than if you let the money sit in the existing 401(k) or rolled it over to a new employer’s plan.