When you started your first full-time job, you probably started putting money in a 401K account, especially if your company matched your contributions. However, when you change jobs, you no longer contribute to the same account, and when you get close to retirement, you want to choose an account that has tax benefits. Therefore, these are some things you should know about your options, including a 401K rollover.
If you leave your company, whether due to retirement or another job, you have the option of cashing out your 401K. You can quickly get your money out of the fund by speaking with your former employer or the company servicing your retirement account. However, you will have tax penalties for withdrawing the cash. For example, you may have to pay withholding taxes of up to 20%, and you may receive an early distribution penalty of an additional 10%.
Leave Your Money
Some employers allow their former employees to leave their money in their original 401K accounts. Your employer has several options. First, your money can be left alone and invested in the rest of the company’s accounts. However, because you no longer work there, you may be required to pay administration fees.
If your account has a low balance, below $5,000, your ex-employer may also close your 401K and move your money to an IRA account. In addition, your account could be moved to another service provider. If your balance is low enough, below $1,000, and you receive a check from the company, closing out the account, it should be reinvested quickly to avoid penalties, typically within 60 days.
You can also withdraw your money from your 401K and invest it into an IRA. You can either ask your service provider to roll it over, or you can get a check for your balance and start an IRA yourself.
This option is beneficial because you will typically have lower fees. However, if you roll your money into a Roth IRA, you will have to pay taxes because this is a post-tax investment that allows you to withdraw money without paying taxes when you retire.
Rollover to Your New Employer
Your last option is to roll your 401K over to your new employer’s 401K or another investment program. This option keeps your money in one place, giving you better control over your investments. You can also track your investments easier when they are in a single account.
As you consider a 401K rollover option, be sure to research all the pros and cons of each option available.