401k Rollover Options

A rollover of 401k funds from an account held by a former employer is almost always a good idea. There are several rollover choices available. The sensible rollover choice is not a one-size-fits-all option – estimated retirement age, marginal tax rates, ability to pay some taxes upfront, and earnings are all factors that must be considered.

In the broadest terms 401k rollover options fall into 4 categories to preserve the tax status of the retirement funds to be rolled over:

Rollover the funds to a Traditional IRA

This option makes sense if there are multiple 401k accounts from different past jobs or the 401k resides with a former employer. The traditional IRA often has significantly smaller fees associated with it and offers more investment options than most 401k’s. This flexibility allows for greater tailoring of the account to the participant’s risk tolerance. Age plays an important role in this consideration since there are requirements for when money can be contributed and withdrawn.

Rollover the funds to a Roth IRA

A 401k rollover to Roth IRA makes sense if you are in a lower tax bracket.  The Roth IRA differs from the traditional IRA in that the funds and the interest remain tax-free upon withdrawal (provided certain rules are met). The difference is that contributions are come from after-tax funds. The most important consideration for this option is whether paying the tax on the 401k funds at the time of rollover is financially worth it.  If you’re in a low tax bracket, it almost certainly is.  If you’re in a higher tax bracket, you have a much tougher decision. Estimated retirement age is also a consideration.

Rollover the funds to your current employer’s 401k

Consolidating past 401k’s into a single current one simplifies the financial picture. And it may make great sense depending upon the conditions of the new 401k and the length of time the employee expects to remain with the employer. Consolidating the funds will often increase the yield and offer the participant streamlined specifications on investment strategies. Disadvantages include the need to transfer funds again if the employee changes employers in the future.

Rollover the funds to a pension-type plan

As long as the fund serves the same tax purpose as the original 401k and the new plan allows the transfer of funds, then this is an option. Taking advantage of such a transfer is best done with clear financial advice from a professional to avoid extra fees and possible tax penalties.

Rollovers of retirement funds are great tools used to preserve retirement funds and keep them working in the best manner possible.