When retirement knocks on your door, you’ll have some decisions to make. One such choice is what to do with the 401(k) plans you may have contributed to throughout your career. A common option is to roll over your 401(k) to an individual retirement account (IRA). Here’s what you need to know.
Decisions to make
If you have assets in multiple 401(k) plans, you have four options to consider for a rollover:
- Roll over your assets to an IRA.
- Roll them over to your current 401(k) plan, if available and permitted by the plan.
- Leave your assets in your old 401(k) plans, if permitted by that plan.
- Take all the money at once. With a full distribution, 20% of your funds are automatically withheld for federal income taxes. Paying state tax is optional and can be withheld from your distribution. If you don’t deposit these funds into a new IRA account within 60 days, you’ll also be subject to a 10% early distribution penalty.
Your choice will likely depend on several factors, such as fees and expenses, level of service, investment options, the presence of employer stock, taxes, and your comfort with having your assets in an IRA rather than an employer-sponsored plan.
Why choose to roll over to an IRA?
Rollovers are a popular choice for people during their careers, as well as at retirement. Choosing to roll over assets to an IRA when you retire may enable you to:
- Consolidate your retirement funds to avoid potential administrative fees that may be associated with employer plans.
- Preserve the tax-advantaged status of your retirement assets.
- Broaden your investment choices.
There may be other reasons to choose a rollover. Perhaps you want to take a more active approach to your retirement investing or you want professional management. Either way, a rollover to an IRA can make it easy.
The choice is yours
No matter which rollover option you choose for your 401(k)s, be sure to notify the appropriate individual. Otherwise, you could receive a check payable to you. This could create a tax obligation and possibly trigger penalties if funds are not deposited into your IRA within 60 days.
Finally, consider your needs, then weigh the pros and cons to make a choice that works best for you. If you need help deciding what to do with your 401(k) when you retire, contact your financial advisor.
Article provided by Local Government Federal Credit Union.
The advice provided is for informational purposes only. Contact a financial advisor for additional guidance.