Rollovers
Mastering Contributions
Definition of The Term
Rollovers are a critical step in maintaining control over your retirement funds when you change jobs or retire. They allow you to transfer your savings from one retirement plan to another without tax penalties, preserving the tax-deferred status of your investments. It's a process that requires careful attention to rules and timelines to ensure your money continues to work for you as you transition from one phase of your career to another.
Key Points
Additional Resources + Information
When leaving a job, it's crucial to remember these options for your 401(k):
- Roll it Over: Move your funds to an IRA or your new employer’s plan.
- Leave it: Keep your 401(k) with your former employer’s plan.
- Consolidate: Combine it with your new employer’s 401(k) plan.
- Cash Out: Withdraw your funds, which may lead to taxes and penalties.
Different Rollover Methods
Direct Rollover
A direct rollover is the most straightforward method. It involves the transfer of your retirement funds directly from your old employer's plan to a new employer's plan or to an Individual Retirement Account (IRA). This method is preferable as it avoids taxes and penalties.
Trustee-to-Trustee Transfer
This is a type of direct rollover where funds are transferred directly between financial institutions, maintaining their tax-deferred status and avoiding any withholding taxes.
60-Day Rollover
If funds are paid to you, you have 60 days to redeposit them into a new retirement plan or IRA. If you fail to do so within this period, you could face taxes and penalties.
Understanding Direct vs. Indirect Rollovers
Direct Rollover
Assets are moved electronically or via a check payable to your new account, avoiding both taxes and potential penalties.
Indirect Rollover
You receive the funds and must redeposit them into a new retirement account within 60 days. Failure to do so results in taxes and penalties.
Special Consideration For Company Stock
If your 401(k) includes company stock, consider the tax implications of net unrealized appreciation (NUA) before rolling over, as it may be more beneficial tax-wise to take a distribution of the stock instead.
Remember to Rollover
Don't be among the many who forget this crucial step. A rollover is not just a box to check; it's a disciplined move to ensure your retirement savings continue to benefit from tax-deferred growth and active financial management. Whether you're moving to a new job with a better match or taking a break, remember to take your retirement savings with you.