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401(k) Plan Rollovers: 5 Frequently Asked Questions

Summit Financial Advisors

Provided by Summit Financial Advisors

I’M LEAVING MY JOB. WHAT CAN I DO WITH THE MONEY IN MY 401(K)?

Take the money now: While you might put this windfall to good use, bear in mind that you’ll pay taxes on the proceeds in addition to a 10% early distribution penalty if you are under the age of 59 1/2.

Keep the money in your current plan if your employer allows it: This preserves your money’s tax-deferred status but spreads your retirement savings across multiple accounts and limits you to the investment options and withdrawal rules set by the plan – which means you may not have immediate access to your funds.

Rollover your account to an IRA (Individual Retirement Account) or your new employer’s 401(k): This option avoids an early distribution penalty and keeps all your 401(k) retirement savings in one account.

WHAT IS A ROLLOVER AND WHY SHOULD I CONSIDER IT?

A rollover is a transfer of your money from one retirement account to another, preserving your retirement savings’ tax-deferred status. This allows your savings to keep growing and avoids paying taxes on the money until you retire.

WHAT ARE MY OPTIONS FOR A ROLLOVER?

Rolling over to an IRA offers several benefits. This option is available no matter what your employment status; you can choose a provider that has the investment options you want; and you have more withdrawal flexibility than most 401(k)s.

Your new employer’s 401(k) plan will usually accept rollover contributions as well. Choosing this option offers simplicity, as all of your retirement savings may be in one account. In addition, 401(k)s offer higher annual contribution limits than an IRA, and many allow you to borrow from your account – a feature not offered by IRAs.

WILL I NEED TO PAY TAXES ON A ROLLOVER?

No – if your rollover goes directly to an IRA or another 401(k). Before you initiate a transfer, talk with your financial professional located at your credit union to ensure your rollover preserves the tax-deferred status of your account.

ARE THERE OTHER FACTORS I SHOULD CONSIDER WHEN PURSUING A 401(K) ROLLOVER?

Please be sure to consider the following:

  • If you don’t take action by a specified deadline and your account balance is between $1,000 and $5,000, your former employer may automatically rollover your money into an IRA.
  • If your account holds less than $1,000 and you don’t make a distribution choice, you could receive a check for the balance, with 20% withheld for taxes. Once you receive your money, however, you usually have 60 days to perform a rollover and avoid taxes and penalties.
  • Nearly one-third of employers have a 6-12 month waiting period before you can start making contributions to your new 401(k). Your financial professional located at your credit union can help you explore alternatives that will keep your retirement savings growing during that waiting period.

If you’d like to learn more about how planning ahead today can pay off in your future, contact a financial professional at Summit Financial Advisors at 800-236-5560, Ext. 4012 or online.  

 

Representatives are registered, securities sold, advisory services offered through CUNA Brokerage Services, Inc. (CBSI), member FINRA/ SIPC, a registered broker/dealer and investment advisor, which is not an affiliate of the credit union. CBSI is under contract with the financial institution to make securities available to members. Not NCUA/NCUSIF/FDIC insured, May Lose Value, No Financial Institution Guarantee. Not a deposit of any financial institution. CUNA Brokerage Services, Inc., is a registered broker/dealer in all fifty states of the United States of America. 
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