Questions to ask when considering a 401(k) rollover

What is a 401(k) rollover?

A 401(k) rollover transfers assets from your previous employer’s plan directly to another tax-deferred account. With a rollover, you are not withdrawing any money or taking distributions, so you will not have to pay any taxes or penalties as a result.

401(k) rollover options

When you leave your job, you will have to decide what you want to do with your existing 401(k). While you may be able to leave it with your former employer, you will not be able to make additional contributions or receive any matching contributions. If you decide that a rollover makes sense, here are some options that you may want to consider:

1. Roll over to another employer plan

If your new employer allows rollovers (some do not), you can simply transfer your assets from one plan to another. Here are a few pros and cons of rolling one 401(k) into another:

401(k) rollover pros

• You can avoid early withdrawal penalties.
• You may be able to get additional benefits, such as lower fees or greater matching contributions.
• You may be able to borrow from your 401(k) in order to pay for expenses like purchasing a home or paying college tuition (subject to limits).

401(k) rollover cons

• As with any employer-sponsored retirement plan, you are limited to your plan’s investment options (unless it features a brokerage window that allows you to buy and sell investments through a built-in platform).
  

2. 401(k) rollover to a traditional IRA

If you are interested in having more control over your money, you may want to roll your assets into a traditional IRA. That way, you can select the management style, expense ratio, and investment options that best suit your needs. Like a 401(k), the money you put into the IRA isn’t taxed initially, but it will be taxed upon withdrawal. The following are some of the pros and cons of rolling over to a traditional IRA:

Traditional IRA rollover pros

• You can make additional contributions past the age of 70½ if you are earning income.
• You will have a wider range of investment options than most employer-sponsored 401(k) plans.
• You will have greater control of your investments.
• You can seek individualized investment advice from your financial professional.

Traditional IRA rollover cons

• You must take required minimum distributions (RMDs) if you are still employed past age 73.
• You cannot borrow from this account.
• You may find that fees are higher than those for employer-sponsored 401(k) plans.
• You may not have the same level of protection against creditors as you would with an employer-sponsored 401(k) plan.

3. 401(k) rollover to a Roth IRA

Much like a traditional IRA, a Roth IRA offers greater control over your assets than is usually the case with a 401(k). With a Roth IRA, however, you pay ordinary income taxes on any money you roll over, but future earnings will be 100% tax free (provided the account is at least five years old and you are at least age 59½). Here are some of the pros and cons of rolling over to a Roth IRA:

Roth IRA rollover pros

• You may be able to make additional contributions if you do not exceed income limits.
• You do not have to make mandatory withdrawals once you reach age 73.
• You will have a wider range of investment choices.
• You will have greater control over your assets.
• You can seek individualized investment advice from your financial advisor.

Roth IRA rollover cons

• You cannot borrow from the account.
• You fees may be higher than those for employer-sponsored 401(k) plans.
• You may not have the same level of protection against creditors as an employer-sponsored 401(k) plan.

4. 401(k) rollover to an annuity*

If you are looking for a long-term, low-risk retirement solution, you may want roll your assets into a guaranteed lifetime income annuity. With this type of annuity, you don’t have to worry about outliving your money because you are guaranteed to receive monthly income checks for the rest of your life. Here are some of the pros and cons of rolling your 401(k) into an annuity:

Annuity rollover pros

• You will enjoy a steady stream of income that's guaranteed to last for the rest of your life—no matter how long you live.¹
• You won’t have to worry about the impact a down market will have on your payments.
• You do not pay taxes on your earnings until you receive annuity payments.
• You can use your annuity payments to satisfy your Required Minimum Distributions (RMDS).

Annuity rollover cons

• You may incur high fees and commissions.
• You will have less liquidity than with other investment options, since the only way you can get your premiums back is with income payments.
• You should be aware that the rules and regulations surrounding annuities can be complicated as well, so it’s always advisable to discuss your options with your financial advisor.

5. Take a lump sum

While you also have the option to liquidate your 401(k) and take the money you’ve saved in a lump sum, it’s important to know that the IRS does not consider this a “rollover.” Since your assets are not being transferred into another tax-deferred account, it’s important to weigh the pros and cons carefully:

Lump-sum pros

• You can use the money in whatever way you want.

Lump sum cons

• You will incur a 10% penalty for early withdrawal if you are under age 59½ (unless you retired after reaching age 55).
• You will have 20% of your account withheld for federal income taxes, along with any state or local taxes.
• Any future earnings on this money will also be taxable.

Penalties for early 401(k) withdrawals

If you withdraw money from your 401(k) prior to age 59½, you will have to pay ordinary income taxes (which can range from 10%-39%) as well as a 10% tax penalty on the amount withdrawn. Under certain circumstances, hardship distributions are allowed and you can also avoid taxes and penalties if you retired after age 55. Loans, which must be paid back, may also be allowed. Check your plan document and summary description to see what your plan allows.

Questions to consider before rolling over your 401(k)

1. How long do I have to roll over my 401(k)?

You can roll over a 401(k) at any point after you switch jobs or retire. Bear in mind, though, that the IRS gives you just 60 days after you receive a retirement plan distribution to roll it over to an IRA or another 401(k) plan. If you miss the 60-day deadline, your 401(k) distribution will be taxed. And if you are under the age of 59½, there may be an additional 10 percent penalty tax. To avoid the possibility of a costly penalty and mandatory 20% federal withholding, it may be best to roll over the 401(k) directly to another tax-deferred plan.

2. When can I roll over my 401(k)?

Most people roll over their 401(k)s after they change jobs or retire. But some 401(k) plans allow employees to roll over funds while they are still working. It’s best to work with a financial professional to weigh the costs and benefits of this option.

3. Do I have to roll over my 401(k) when I retire?

You don’t have to roll over your 401(k), but when you leave your money with your former employer’s plan, your investment choices are limited to what’s available in the plan. There also may be limitations on when and how you can shift your investments.

4. Will taxes be withheld if I roll over my 401(k) to another qualified retirement plan?

You can avoid mandatory tax withholding by requesting a direct rollover, with the check made payable directly to your new trustee. If there is no distribution payable to you, the transfer is tax free.

5. Can I roll over just part of my 401(k) account?

Yes. You can use a rollover to move a portion of your funds from a 401(k) to another tax-qualified plan.

6. Do I have to report my 401(k) rollover transactions on my tax return?

IRA rollovers are reported on your tax return as a nontaxable transaction. However, you should mention any IRA rollover to your tax preparer—or double-check all documentation if you prepare your taxes yourself.

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¹Guarantees are subject to the claims-paying ability of the issuer.

*Annuities or tax-deferred investments in tax-qualified retirement plans (like IRAs, TSAs, and SEPs) already provide tax deferral under the Internal Revenue Code, so the tax deferral of an annuity does not provide any additional benefits. Thus, an annuity should only be purchased in an IRA or qualified plan if the client values other features of the annuity and is willing to incur additional costs associated with the annuity to receive such benefits.

Neither New York Life nor its representatives or affiliates provide tax or legal advice. Consult with a tax or legal advisor to discuss any questions or concerns that you have, such as the tax consequences of withdrawing funds or removing shares of an employer’s stock from a retirement plan and whether money invested in a retirement plan receives greater protection from creditors and legal judgments in your state than money invested in an IRA or annuity. Also, consider that you may be able to take taxable, but penalty-free, withdrawals from an employer-sponsored retirement plan between the ages of 55 and 59½ that you would not be able to take if you roll over your funds to an IRA or annuity. Additionally, if you plan to work after you reach age 73, you may not be required to take minimum distributions from your current employer’s retirement plan, but would be required to do so for funds invested in an IRA or annuity.