When it comes to retirement planning, there are a lot of moving parts. One important decision is what to do with your retirement savings when you leave your job. You may be able to roll over your 401(k) or other employer-sponsored retirement plan into an IRA. Or you may choose to cash out your account. Both options have pros and cons.
Rolling over your account may be the best choice if you want to keep your money invested and continue to grow your nest egg. Cashing out may make sense if you need the money to cover immediate expenses. But cashing out comes with taxes and penalties that can eat into your savings.
Before making a decision, it’s important to understand all of your options. This blog will explore the different rollover options available to you and help you decide which one is right for your situation.
What is a Retirement Plan Rollover?
A retirement plan rollover is when you move money from one retirement account to another. This can be done for a variety of reasons, such as wanting to invest in a different type of account or consolidating multiple accounts.
When you retire, you have the option to rollover your retirement plan into another plan or take the money as a lump sum. Rolling over into another plan is usually the best option because it allows you to continue growing your savings tax-deferred. The most common retirement plans that are rolled over are 401(k)s and 403(b)s.
What Are the Benefits of Doing a Retirement Plan Rollover?
There can be several benefits to doing a retirement plan rollover. These can include:
- Reducing fees
- Diversifying your investments
- Consolidating multiple accounts
Retirement Plan Rollover Options
There are a few different options when it comes to rolling over your retirement plan. You can roll over into another employer’s plan, you can roll over into an Individual Retirement Account (IRA), or you can cash out the plan entirely.
- Rolling over into another employer’s plan is usually only possible if the new employer offers a retirement plan that accepts rollovers. This option can be beneficial because it allows you to keep your money in a tax-deferred account.
- Rolling over into an IRA is a good option if you want more control over how your money is invested. With an IRA, you can choose from a wider range of investment options than with most employer-sponsored retirement plans.
- Cashing out your retirement plan entirely should be a last resort. This is because you will have to pay taxes on the money that you withdraw, and you may also be subject to an early withdrawal penalty if you are younger than 59½.
What Are the Different Types of Retirement Plan Rollovers?
There are a few different types of retirement plan rollovers. The most common are:
With a direct rollover, the money is transferred directly from one account to another. The advantage of a direct rollover is that there is no tax liability on the money being rolled over.
An indirect rollover is slightly more complicated.With this type of rollover, the money is first withdrawn from the original account and then deposited into the new account.
The advantage of an indirect rollover is that it allows you to take a 60-day loan with the money before it is deposited into the new account. However, there is a downside to an indirect rollover: if you do not deposit the money into the new account within 60 days, you will be subject to taxes and penalties on the money.
This option involves converting a traditional IRA into a Roth IRA. One of the benefits of a Roth conversion is that it allows you to take advantage of tax-free growth on your investments. With a Roth IRA, you do not have to pay taxes on any money that you withdraw from the account. This is different from a traditional IRA, where you have to pay taxes on money that you withdraw from the account.
Another benefit of a Roth conversion is that it allows you to diversify your retirement savings. By converting a traditional IRA into a Roth IRA, you can have both types of accounts and enjoy the benefits of both.
What Are the Requirements for Doing a Retirement Plan Rollover?
Requirements for doing a retirement plan rollover vary depending on the type of rollover you’re doing. For example, indirect rollovers have a 60-day window in which the money must be deposited into the new account, or else it will be considered taxable income. Direct rollovers generally don’t have any such restrictions.
How Do I Do a Retirement Plan Rollover?
The process for doing a retirement plan rollover will vary depending on the type of rollover you’re doing. For example, with a direct rollover, you would simply contact the new account provider and request a transfer from the old account. With an indirect rollover, you would first need to withdraw the money from the old account and then deposit it into the new account within the 60-day window. Roth conversions may require some additional paperwork.
What Are the Tax Implications and Fees of a Rollover?
The tax implications of a retirement plan rollover will depend on the type of rollover you’re doing. In most cases, the money being rolled over will not be subject to any taxes. However, if you do an indirect rollover and don’t deposit the money into the new account within the 60-day window, it will be considered taxable income.
There may be some fees associated with doing a retirement plan rollover, depending on the type of rollover you’re doing and the account providers involved. For example, you may be charged a transfer fee by the old account provider or a deposit fee by the new account provider.
Things to Keep in Mind
Before doing a retirement plan rollover, it’s important to consider your goals and objectives. You should also compare the fees and expenses of the different accounts involved. And finally, make sure you understand the tax implications of the rollover.
For help deciding on your rollover plan, reach out to us today.