Why Your 401(k) Deserves Your Attention

When you leave a job, it can be tempting to leave your old 401(k) account where it is. But doing nothing might not be the best choice for your financial future. It could lead to:

  • Paying unnecessary fees
  • Missing out on better investment opportunities
  • Losing track of your retirement savings
  • If employer goes out of business, your 401(k) could be stuck in litigation.

Moving your old plan gives you maximum control over your money, including advanced ways to optimize your taxes. But this may leave you with some questions.

“Leaving retirement savings at multiple employers can create higher investment costs to keep the account in former employer plans or create an inconvenience to maintain and rebalance.”

Your Rollover Options

 

If permitted by the 401(k) plan documents, a former employee can leave their 401(k) in the employer’s plan when they terminate their employment. Here’s what to check:

Can you leave your 401(k) plan?

  • Is there paperwork to fill out to initiate a transfer?
  • Can you rebalance the investment strategies if you leave your 401(k)?

Why would an employee choose this option?

  • The new employer may have a waiting period before enrollment, and the employee intends to roll over their 401(k) to the new employer’s 401(k) plan.
  • The fees may cost less
  • The old 401(k) plan has investments more aligned with the employee’s investing strategy.

Rolling your old 401(k) into your new employer’s 401(k) plan may be possible if the new plan accepts rollovers. Be sure to evaluate your new employer’s 401(k) plan before making your decision by examining the following:

  • Compare both 401(k) plans fund options, fees, management expenses, and possibly commissions.
  • Remember that costs may decrease the return over time.
  • The waiting period to roll over your old 401(k) to your new 401(k)
  • The cost to roll over your 401(k) to another 401(k) plan.
  • Ownership: In a qualified retirement plan, you are the participant and not the owner, and the plan administrator determines your distribution options in moving your 401(k) assets to another 401(k).

You have a few options with a direct rollover:

  • 401(k) into an IRA– You can roll over your 401(k) into your existing IRA or open a new IRA and initiate transfer paperwork with the help of your former retirement plan administrator, HR department, and financial professional.
  • 401(k) Roth into a Roth IRA– You can roll your 401(k) Roth into an existing Roth IRA or open a new one. No taxes are due when the money moves, and any recent earnings accumulate tax deferred. Earnings are eligible for tax-free withdrawal once the Roth IRA has been open for at least five years and you are at least 59 1/2.
  • 401(k) into a Roth IRA– If your 401(k) plan permits rollovers into a Roth IRA, you can initiate the rollover into your Roth IRA or open a new one. Be aware that you will need to pay taxes at the time of the rollover transfer, so you must consult your tax professional before converting your 401(k) to a Roth IRA. Earnings on the Roth IRA that accumulate after the rollover will be eligible for tax-free withdrawal when the Roth IRA has been open for at least five years and you are at least 59½.

What to consider before rolling over your 401(k) to an IRA or Roth IRA:

  • The cost to roll over your 401(k) to an IRA plan.
  • The IRA fund options, fees, management expenses, and commissions.

An annuity is a contract with an insurance company to provide an income stream during retirement for a specified period or the remainder of the annuitant’s life. Annuities help address the risk of outliving their retirement savings and are purchased with monthly premiums or a lump-sum payment, such as when you roll over your 401(k).

The three types of annuities widely used in financial planning are fixed, indexed, and variable annuities. Like any financial product, each type of annuity has costs, pros, and cons. Annuities are not without risk, and due diligence should take precedence before purchasing one for your retirement portfolio.*

Cashing out a 401(k) becomes a taxable event since the contributions and accumulation are taxable, regardless of the employee’s age. Here’s what you need to consider:

  • If you are younger than 59 1/2, you will pay a 10% penalty.
  • Taxes will be immediately due on the 401(k)’s contributions and accumulation.
  • The IRS allows penalty-free withdrawals from retirement accounts after age 59 1/2 and requires minimum withdrawals (RMDs) after age 73 and 75 starting in 2033.
  • Some exceptions exist for 401ks and other qualified plans, so you must consult your plan administrator

Be Careful About Cashing Out.

Before you rush to take the money and buy your dream house, consider the following repercussions as they are serious and permanent.

You will pay ordinary income on any withdrawal you take. Let’s give you an example, if you earn $50,000 per year in income, and you withdraw $100,000 from your company retirement plan, you will need to report to the IRS, you made $150,000 that year. Imagine what that will do to your tax bill.

Because of that, your old employer will generally withhold 20% right off the top to pay Uncle Sam.


$50,000

+

$100,000

=

$150,000

FAQ’s

Rollovers typically take 2–4 weeks to complete, depending on your old employer’s plan

Your contributions to your retirement savings are ultimately yours, but there are situations where the rollover can be delayed. Employers have the power to freeze your 401(k) due to pending litigations, mergers, or changes in administrators. This legally requires them to provide a 30-day notice prior so you can make necessary arrangements, but be aware that during this time no contributions will be allowed and withdrawals may not either.

There’s also another wrinkle to consider: You may not get the employer-contributed funds when your old plan involves a vesting schedule. This means you must work with your employer for a certain amount of time before any contributions become completely owned by you. With 0% vested status, only the money that has come directly from yourself can be withdrawn; at 100%, all of the cash in your 401(k), including interest or further additions made by your company are fully accessible. If your employment ends earlier than stipulated within the vesting schedule, some or all the employer contributions may not belong to you.

The short answer is no. A 401(k) plan is not required to accept rollover contributions. Your new employer may also limit the types of plans from which rollovers are accepted: i.e., 401(k) plans, 403(b) plans, 457 plans, or IRAs.

It depends on how and where you decide to roll over the money. That’s why it’s a great idea to review your situation with a financial advisor before taking action. Here are the key types of rollovers from a 401(k):

Direct rollovers. A direct 401(k) rollover gives you the option to transfer funds from your old plan directly into your new employer’s 401(k) plan without incurring taxes or penalties.

Indirect rollovers. You receive the funds from your previous employer’s plan in the form of a check and if you don’t deposit the check within 60 days of receiving it and are under the age of 59 ½, you’ll get hit with a 10% early-withdrawal penalty on top of any taxes. A further complication of receiving the distribution yourself is that your ex-employer will be required to withhold 20% of it for taxes. If you then want to deposit your full balance into an IRA, you’ll have to come up with other money to make up for the 20% that’s been withheld.

Rolling over a traditional 401(k) to a traditional IRA. Here the taxes are deferred and you won’t owe anything.

Rolling over from a traditional 401(k) to a Roth IRA. You’ll owe income taxes on the amount you roll over. It is possible to save money in the long run if your current tax rate is lower than what’s anticipated to happen in the future.

The Cost Of Not Taking Action

Leaving retirement savings at multiple employers can create higher investment costs to keep the account in former employer plans. It can also create an inconvenience to maintain and rebalance the old 401(k).

How We Can Help

At Trajan Wealth, we specialize in helping people just like you make informed decisions about their 401(k) rollovers. Our fiduciary advisors work with your best interests in mind, offering personalized guidance every step of the way.

Your Next Steps

Taking control of your 401(k) is easier than you think. Here’s how to get started:

  1. Schedule a Free Consultation: Our team will review your current 401(k) plan and help identify the best option for your goals.
  2. Get a Customized Plan: We’ll tailor our recommendations to align with your financial future.
  3. Take Action: Let us handle the details so you can focus on what matters most.

Leaving your 401(k) untouched could cost you. Take charge of your retirement savings now.

Contact Us Today