You have sixty days to deposit your 401(k) funds into a new retirement account after you leave your former employer. That’s part of the information you’ll get when you ask your plan administrator how to rollover a 401k. You can roll over into your new employer’s 401(k), a traditional IRA, or a Roth IRA. Those three options are explained below:
Rollover into a new 401(k) plan
The 60-day rule was put in place by the Internal Revenue Service to give sufficient time for individuals changing jobs to move their retirement savings, with a simple rollover to your new employer’s 401(k), which can generally be done by the plan administrators. You will just need to sign some transfer forms.
Rollover into a traditional IRA
A traditional IRA is an individual retirement account that functions like a 401(k), but it’s controlled by the account holder, not the employer. Employees often rollover to a traditional IRA when they become self-employed or don’t have a new job lined up. It’s a little more complicated than a 401(k) to 401(k) rollover, but it’s still simple to complete.
Rollover into a Roth IRA
Contributions to traditional IRAs and 401(k) funds are tax-deferred, meaning you don’t need to pay taxes on that money until you withdraw it. Contributions to a Roth IRA are made after taxes have been taken, so in a Roth IRA rollover, you’ll need to pay income taxes on the money being transferred.
Contribution limits and income tax liability
The IRS has a maximum annual contribution rule for all retirement accounts. With a 401(k), that maximum is $22,500 per year, with an additional $7,500 allowed if you’re over fifty years old. Contributions to a traditional IRA or Roth IRA cannot exceed $6,500 per year, $7,500 if you’re fifty or older. That’s something to keep in mind when you do your rollover executive search firms.
Contributions for 401(k)s and IRAs are tax-deferred, so you won’t owe income tax on rollovers to either of them. Roth IRA contributions are made after income taxes have been paid. Moving tax-deferred funds from a 401(k) or traditional IRA to a Roth IRA incurs a tax liability. The amount will be added to your total income for the year you initiate the rollover.
Cash outs and early withdrawal penalties
The money in your retirement savings account is yours, so you can cash it out anytime. Unfortunately, you’ll pay a 10% early withdrawal penalty plus income taxes on the funds if you choose to go this route. Cashing out may be your only option if your 401(k) has less than $1,000 in it. Accounts with over $1,000 should be rolled over if possible.
Failing to meet the 60-day requirement for a rollover could result in an automatic cash out that includes the early withdrawal penalty and income taxes. You’ll want to avoid that if possible, so start the process of rolling over your retirement savings early. Speak with the plan administrator at your old job to see what you need to do to avoid penalties.
The Bottom Line
The IRS has established a 60-day requirement for rolling over your 401(k) after you leave a job. You can move those funds into your new employer’s 401(k), into a traditional IRA, or into a Roth IRA. You could also choose to cash them out, but you’ll pay a 10% early withdrawal penalty, and you’ll owe income taxes on that money for the year you do the cash out.
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