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What to Consider Before Doing a 401(k) Rollover
1. Where Are You Rolling It To?Traditional IRA: Maintains tax-deferred status.Roth IRA: Triggers taxes at the time of rollover (converts pre-tax to post-tax).New Employer's 401(k): Keeps assets in a plan if allowed.
2. Tax ImplicationsTraditional 401(k) → Traditional IRA: No taxes due.Traditional 401(k) → Roth IRA: Taxable rollover; consult a tax advisor.Roth 401(k) → Roth IRA: No taxes if done properly.Direct vs Indirect Rollover: - Direct Rollover: Funds sent directly to the new account—no tax withheld. - Indirect Rollover: You receive the funds and must redeposit within 60 days—or it's taxable.
3. Fees and Investment OptionsCompare the fees and investment choices in: - Your current 401(k) - The new employer’s plan - The IRA you’re considering
4. Required Minimum Distributions (RMDs)IRAs require RMDs starting at age 73.If you're still working, some 401(k)s let you delay RMDs.
5. Creditor Protection401(k)s offer stronger protection under federal law than IRAs (varies by state).
6. Access to Funds401(k): Penalty-free withdrawals at age 55 if separated from service.IRA: 10% early withdrawal penalty before age 59½ (unless exceptions apply).