Retiring or leaving a job — no matter the reason — can be a frenzied process. Sometimes the last thing you want to worry about is what to do with the money in your 401(k) or other employer-sponsored retirement plan. But it’s important to understand your options and choose wisely so you don’t trigger any unintended consequences.
The following are four choices you may have:
- Leave the money in your former employer’s plan. You may have to meet a minimum balance requirement for your money to remain in the plan.
- Roll the money over to your new employer’s plan. Most plans accept rollovers, but not all do.
- Roll the money over to an individual retirement account (IRA). You can do this with either a direct (trustee-to-trustee) transfer or a rollover where you take control of the funds for up to 60 days.
- Cash out your balance. You’ll owe income tax and a 10% tax penalty if you're under age 55. Plus, you’ll lose the benefit of all future tax-deferred compounding on those funds.
Why Roll Over to an IRA?
For many individuals, rolling over the balance into a traditional IRA may be a better option than leaving the balance in your current employer’s plan. Advantages include:
More investment options. Employer-sponsored retirement plans generally offer limited investment options. With an IRA, you have access to a greater range of investments, including some that may be more suitable to your goals, timeline and risk tolerance.
Greater flexibility. Some employers allow only lump-sum distributions and others may limit the frequency of withdrawals. If you roll the money into an IRA, you can take it out on your own schedule, provided you are at least age 59 ½.*
More convenience. If you roll all your previous employers’ plan balances into an IRA, you’ll have a single, consolidated account to keep track of. That makes it easier to monitor your investments, rebalance as appropriate and schedule required minimum distributions.
Potential estate-planning benefits. With some employer-sponsored retirement plans, heirs must take out all the assets after the account holder dies and face a potentially large tax bill. Beneficiaries of IRAs may be able to stretch out distributions over their lifetime or a set period of time.**
Roll It Right
If you choose to roll over your balance into an IRA, it’s important to make sure your plan administrator transfers your balance directly into an IRA. An Amegy banker can help you navigate the process of rolling over your 401 (k) to an IRA.
* IRA withdrawals made before age 59 1/2, with certain exceptions, are subject to a 10% tax penalty. You are required to start taking distributions from a traditional IRA at age 72 or face a 50% tax penalty on the amount that should have been withdrawn, but wasn't.
** Spouses may roll over inherited IRAs and treat them as their own. Nonspouse beneficiaries are subject to IRS distribution rules for inherited IRAs.
Neither this financial institution nor any of its affiliates give tax advice. Consult your tax advisor or attorney for information specific to your situation.