What can you rollover a 401(k) into?

401(k) rollovers are a powerful tool for managing your retirement savings. When you leave your job, you have several options for what to do with your 401(k) plan: you can roll it over to an IRA, cash it out, keep the plan as is, or consolidate it with a new 401(k). Each option has different tax and financial implications, so it’s important to understand your options before making a decision.

What are the different options for rolling over a 401(k)?

There are four main options for what to do with your 401(k) if you leave a job:

1. Roll it into an IRA: This is the most common option, as it offers a number of benefits, including more investment choices and, in some cases, lower fees. There are three types of 401(k) rollovers you can do if you decide you’d like to roll your assets into an IRA:

   • A rollover from a traditional 401(k) to a traditional IRA: Taxes on the money rolled over and any investment earnings are deferred until you take distributions in retirement.
   • A rollover from a traditional 401(k) to a Roth IRA: Because your 401(k) contributions were made pre-tax, and a Roth IRA is an after-tax account, there are tax consequences to this. You’ll owe taxes on the rolled-over amount in the year of the rollover. But it can have benefits in the future, as you won’t owe taxes on qualified distributions from the Roth IRA in retirement.
   • A rollover from a Roth 401(k) to a Roth IRA: You won’t incur taxes on this type of rollover, because a Roth 401(k) and a Roth IRA are both funded with after-tax dollars.

2. Roll your old 401(k) over to a new employer: To keep your money in one place, you may want to transfer assets from your old 401(k) to your new employer’s 401(k) plan, assuming your new plan allows this. Doing this will make it easier to see how your assets are performing because they will all be in one place.

3. Keep your 401(k) with a former employer: If your ex-employer allows it, you can leave your 401(k) money where it is. Reasons to do this include good investment options and reasonable fees with your former employer’s plan. Keep in mind that you may not be able to ask the plan administrator any questions, you may pay higher 401(k) fees as an ex-employee, and you can’t make additional contributions.

4. Cash out your 401(k): The last option you have for an old 401(k) account is cashing it out, but that may come at a high cost. You can ask your former employer for a check, but as with the indirect rollover, your former employer may withhold 20% to pay Uncle Sam for your distribution. The IRS also may classify this cash out as an early distribution, meaning you incur a 10% penalty and potentially taxes unless it’s a qualified distribution.

What are the benefits of rolling over a 401(k) to an IRA?

Many people benefit from turning a 401(k) into a rollover IRA after leaving a job, often in the form of lower fees, a larger investment selection or both. But it’s important to know the pros and cons before making this decision — after all, we’re talking about your retirement savings here.

Pros of rolling over a 401(k) to an IRA:

• No taxes or penalties: With a direct 401(k) rollover into a traditional IRA, taxes continue to be deferred until you withdraw money.
• Wider investment selection: You get access to a range of investment options, including stocks, bonds, mutual funds, index funds and exchange-traded funds.
• Maybe lower costs: You can find an IRA provider that charges no fees to open or maintain an account. Many 401(k) plans charge participants administrative fees, though some generous employers pick up the tab. An IRA provider also offers a larger selection of investment choices, which means you may be able to select investments with lower costs.
• Low-cost options for investment management: You can open your IRA at a robo-advisor, a computer-run investment management company. Many of them charge less than 0.50% to manage your account for you, which means they pick your investments and manage them over time.

Cons of rolling over a 401(k) to an IRA:

• Limited creditor protection: 401(k)s (and properly executed rollover IRAs) are protected in bankruptcy and against claims from creditors. But overall IRA protection from creditors varies by state, and bankruptcy protection is limited.
• Loss of access to loans: Many 401(k) providers do allow participants to take loans from the plan. You can’t take a loan from an IRA.
• Required minimum distributions: 401(k)s and traditional IRAs require distributions beginning at age 73. But a 401(k) has a loophole: It allows you to push off those distributions until you actually retire, even if you do so after 73.
• 401(k)s offer potential for earlier access: If you leave your job, you may be able to tap your 401(k) as early as age 55. With an IRA, in most cases you can’t begin taking qualified distributions until age 591⁄2.
• Taxes on company stock: Company stock should generally be rolled over to a taxable brokerage account, not an IRA. If your 401(k) plan holds company stock, we recommend consulting a tax professional.

What are the tax implications of rolling over a 401(k)?

The tax implications of rolling over a 401(k) depend on the type of rollover you choose.

• Traditional 401(k) to traditional IRA: Taxes on the money rolled over and any investment earnings are deferred until you take distributions in retirement.
• Traditional 401(k) to Roth IRA: You’ll owe taxes on the rolled-over amount in the year of the rollover. But it can have benefits in the future, as you won’t owe taxes on qualified distributions from the Roth IRA in retirement.
• Roth 401(k) to Roth IRA: You won’t incur taxes on this type of rollover, because a Roth 401(k) and a Roth IRA are both funded with after-tax dollars.

What are the fees associated with rolling over a 401(k)?

The fees associated with rolling over a 401(k) vary depending on the IRA provider you choose. Some IRA providers charge no fees to open or maintain an account, while others charge annual fees, transaction fees, or both. It’s important to compare fees before you choose an IRA provider.

What are some tips for rolling over a 401(k)?

Here are some tips for rolling over a 401(k):

• Choose the right IRA provider. Compare fees, investment options, and customer service before you choose an IRA provider.
• Do a direct rollover. This will help you avoid paying taxes and penalties on the money you roll over.
• Keep good records. Keep track of all of your paperwork related to your 401(k) rollover.
• Seek professional advice. If you have any questions about rolling over your 401(k), talk to a financial advisor.

Rolling over your 401(k) to an IRA can be a great way to save money on fees and taxes, and to gain access to a wider range of investment options. However, it’s important to understand the different options available to you and to choose the right IRA provider for your needs. If you have any questions, be sure to talk to a financial advisor.