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Rolling Over Your 401(k): Why, What, and How

    

Among the many positive things you’ll take with you when leaving a job—expertise that will push your career upward, colleagues who become lifelong friends—one of the most crucial for long-term financial health is your 401(k). Whether you plan to keep working or are about to start retirement, it’s essential that you take steps to roll over that 401(k) so that your hard-earned investment in time and sweat is there when you need it.

401(k) rollover

Why should I roll over my 401(k)?

If you’re anything like your colleagues, chances are that this isn’t your first change in employment. For each of the 10-15 times an average worker opts for a new job over their lifetime, it becomes increasingly likely they will become one of the 12.5 million people who leave money on the table (a whopping $7.7 billion in 2015).

Choices you make today on how and when to roll over your 401(k) can move the needle in a positive direction on rewards reaped tomorrow.

What does it mean to be fully vested?

In order for a 401(k) rollover to make financial sense, you’ll want to be sure that your account is fully vested. If your company matches a portion (or all) of your contributions, these funds vest over time, typically at 25 percent or 33 percent annually.

Once your account is fully vested, usually over a period of time stipulated by your employer, the money is yours, whether you leave of your own accord or are nudged out the door. Should you leave before the account reaches that point, you risk letting that money go. How much, if any, of the partially vested funds are available to you depends on your employer’s policies. If you’re itching to jump ship or are thinking of early retirement, consider the free money that may blow away in the wind as you leave that job in the rearview mirror.

What are my rollover options?

There are many types of 401(k) rollovers, but always keep your retirement goals, and any potential tax implications, in mind when considering your options:

  • Former employer’s 401(k) to new employer’s 401(k)

  • 401(k) to traditional individual retirement account (IRA)

  • 401(k) to Roth IRA (requires a rollover to a traditional IRA followed by a Roth IRA conversion)

  • No changes to your existing 401(k)

The first option is the most practical if you are staying in the job market and starting with a new employer—unless you’re particularly happy with your plan’s current rate of return, in which case you can leave it right where it is, but you won’t be able to make any new contributions. If retirement is your next stop, a traditional IRA rollover is the most common choice.

How do I choose a rollover based on my retirement needs?

Traditional and Roth IRAs are different vehicles for different purposes. It’s worth a moment to distinguish between the two and select which rollover option makes sense based on your individual needs.

Traditional IRA

This option usually provides a more diverse range of investment options. A few things to keep in mind:

  • To avoid penalties, you can withdraw starting at age 59½.

  • Mandatory distributions are required starting at age 70½, regardless of your retirement status. Once you turn 70½, you can no longer make contributions to a traditional IRA.

  • Contributions are tax deductible, but distributions are not.

  • While there are no income restrictions when contributing to a traditional IRA, income may have an impact on how much of your contributions you can deduct from your taxes.

Roth IRA

This option typically offers more versatility than its traditional counterpart:

  • You can withdraw funds early with no taxes or penalties.

  • There are no minimum distribution requirements. You can let your savings grow throughout your lifetime.

  • You can more easily leave money to your heirs since a Roth IRA allows contributions to continue after age 70½.

Investment options

Investments are a great way to grow your nest egg within either type of IRA, but be sure to think through your comfort level with risk before making a decision. Higher returns are possible with a more stock-heavy account and may hold appeal if you anticipate already having a reliable income stream. But if you believe that stream may dry up come retirement, a conservative approach that relies more on Treasury bonds and money markets may be your safest bet.

While the circumstances surrounding a 401(k) rollover can be exciting, there are a lot of unknowns, what-ifs, and why-nots that can complicate the process. It’s helpful in moments like these to seek out the advice of a trusted partner such as TDECU Wealth Advisors. 

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