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A Simple Guide to 401(k) Rollovers


By Bill Taber


A career move comes with a whole new benefits package—and, for many, that includes a new 401(k). While you’re sorting through insurance options and PTO plans, it’s important to not forget about your old 401(k). This simple guide to 401(k) rollovers lays out your primary options to assure your nest egg will keep growing until it’s time to retire.

When it comes to rollovers, you have two primary options: You can roll your old 401(k) funds into a new employer’s 401(k) or you can roll your old 401(k) funds into an Individual Retirement Account (IRA). Let’s dig into your options.


Option 1: Transfer to a New 401(k)

Before jumping right into your options, take time to review the fees and investment options associated with your new 401(k). If you’re happy with what you find, and when compared to your old plan, then it’s often best to move forward with a direct transfer.


To initiate a direct transfer, you’ll need to be in touch with the administrator of both your old plan and the new plan. The process is simple and involves providing your old plan administrator a few details related to your new plan so they can issue a check or initiate the transfer. This method assures no taxes are assessed when the funds are withdrawn from the old 401(k) and transferred to the new 401(k).


Without a direct transfer, your old 401(k) plan provider will issue a check in your name. 20% of your balance will be withheld for taxes because the transaction is viewed as a withdrawal instead of a transfer. To avoid taxes, you’ll need to deposit the check plus additional funds from elsewhere in the amount of the 20% withholding into your new 401(k) within 60 days.


Example: If your 401(k) balance was $50,000, you’ll receive a check for $40,000 in your name. You will deposit the $40,000 check into your new 401(k) plus $10,000 in funds from elsewhere. Come tax time, you’ll show the full $50,000 transferred and report $10,000 in taxes paid. (1)


Option 2: 401(k) Rollover to an IRA

What if you don’t want to transfer retirement funds into your new 401(k)? You may want more investment options, further diversification, or to potentially pay lower fees. In this case, consider a 401(k) rollover into an IRA.


The first step is to understand if your old 401(k) was a traditional 401(k) or Roth 401(k). From a tax perspective, it’s simplest to move funds between accounts with similar tax principles (e.g., Traditional pre-tax 401(k) contributions to a Traditional IRA; Roth after-tax 401(k) contributions to a Roth IRA). From there the process is much like the 401(k) rollover.


You may be administering the IRA yourself or working with a financial advisor. It is important to assure your old 401(k) plan administrator has the appropriate IRA details for you to avoid receiving a check in your name with taxes withheld.


If you’re going from a traditional 401(k) to a Roth IRA, the balance of your 401(k) will be taxed as ordinary earned income before it is deposited into the Roth IRA. While you’ll feel the tax hit at the time of the conversion, the account grows tax-free and no taxes are assessed when you’re ready to withdraw funds in retirement.


A Roth 401(k) cannot be rolled over into a traditional IRA since the taxes have already been paid. (2) If you’re having trouble determining whether to convert pre-tax 401(k) retirement funds to a Roth account, first consider reviewing your tax bracket and expected future income with a financial advisor for a personalized recommendation.


Which Option Is Best for You?

Actually, there is a third option: Simply leave your money in your old 401(k), but many choose to roll old 401(k) funds over so they don’t lose sight of those accounts with previous employers. And while cashing out may be tempting, you’ll be assessed a 10% penalty and pay taxes on the balance withdrawn. The decision to raid your retirement funds could kill years of the powerful compounding of money effect inherent in long-term, tax-deferred investing and could undermine your plans to retire at a specific age. We consider cashing out of retirement funds early to be one of the biggest financial mistakes an individual can make.


Many choose to review their finances with a trusted financial advisor before conducting a 401(k) rollover, and for good reason. To assure you make the decision that best suits your financial goals with sound tax considerations, meet with Bill Taber of TABER Asset Management.


Get started today by scheduling a 15-minute intro phone call online or reaching out to us at 515-557-1860 or invest@taberasset.com.


About Bill

Bill Taber is President and Founder of TABER Asset Management, an independent, fiduciary wealth management firm that strives to do one thing well: manage their clients’ money by creating wealth, building wealth, growing income, and preserving capital so they can experience financial freedom. With more than four decades of experience, Bill is dedicated to building relationships with his clients and their families and walking alongside them as they navigate financial decisions. His favorite days are the ones when he gets to witness the joy and relief on his clients’ faces when they realize they can pursue their dreams and live their ideal lifestyles. Bill is known for going the extra mile, getting things done with integrity, and working with a stewardship mentality.


Bill graduated from the University of Iowa with a bachelor’s degree in business administration and fell in love with the profession when he got to help one of his first clients—his father—turn his lifetime of hard work into a dream retirement. He got his start in the industry as a corporate services representative for Bankers Trust Company and spent decades working as Assistant Vice President of E.F. Hutton & Co. and First Vice President of Principal Financial Securities. He is also a graduate of the E-Myth Worldwide Mastery Business Development Program and is Series 65 registered.


In his spare time, Bill enjoys giving back to his community and served 11 years as a member of the Board of Trustees of Broadlawns Medical Center and 14 years as a Community Representative to their Board Finance Committee. He is also one of the founding members of the Greater Des Moines Connections Mentoring Program. When he’s not working, you can often find Bill spending time with his family and participating in one of his many hobbies, which include traveling to national parks, presidential libraries, and foreign countries; reading non-fiction; and practicing yoga, Pilates, and meditation. He also loves the simple joys of listening to music, going for walks or bike rides, and watching James Bond 007 films and any movie starring his favorite actress, Meryl Streep. To learn more about Bill, connect with him on LinkedIn.

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(1) https://www.irs.gov/retirement-plans/plan-participant-employee/rollovers-of-retirement-plan-and-ira-distributions

(2) https://www.irs.gov/pub/irs-tege/rollover_chart.pdf


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