A 401(k) rollover refers to the process of taking the money out of your 401(k) and moving it into a different retirement plan. This typically takes place when you leave your company or retire.

Rollover Options

You have the following main options with your 401(k) when you leave an employer:

Cash it out. Cashing it out is usually a mistake. On a traditional 401(k) plan, you’ll have to pay taxes on all of your contributions plus tax penalties for early withdrawals if you’re under 59½. This means you’ll lose all the benefits you worked so hard to accrue.

Keep it in the original employer’s plan. Only if you have an excellent 401(k) with good investment choices and low fees, this could be a good option.

Roll it over into your next employer’s 401(k). If you’re moving to a different company, see whether its rules let you transfer your old balance to your new plan. Only consider this if your new plan is excellent with low fees.

Roll it over into an IRA. An option that is usually better than leaving your money in the 401(k) is to roll it into an IRA (Individual Retirement Account). There are a wide variety of IRA investment options, and you can choose one that you like, rather than be tied to the investment options pre-selected in your 401(k). Fees on most IRAs are lower than 401(k) fees.

Roll it Into an Annuity. When you leave your job for a new one or retire, you have a one-time opportunity to take the money from your 401(k) account and transfer it into a better investment vehicle with more flexible investment options, safeguards against losing your principal, and income protection for your retirement years. We firmly believe that investors retiring or changing jobs should at a minimum look into seizing the opportunity to transfer their investment dollars out of the generally restrictive 401(k) plans, and into more flexible plans such as Annuities. Rolling your 401(k) into an annuity gives you a continued tax shelter, guarantee of principal options, and living and death benefits that can protect you and/or your family whether the stock and bond markets go up or down.

If you are wondering whether a rollover is allowed or whether you will have to pay taxes, remember that doing a rollover between accounts that are taxed in similar ways usually doesn’t trigger taxes.

Most rollovers are of traditional, tax-deferred 401(k)s or other employer plans like a 403(b) to Traditional IRAs. You don’t owe taxes on money saved in 401(k)s or Traditional IRAs until you retire and start withdrawing the money.

You can also do a rollover from a Roth 401(k) to a Roth IRA. That doesn’t trigger taxes, either.

To do a rollover from a 401(k) to a Roth IRA, however, is a two-step process. First, you roll over the money to an IRA, then you convert it to a Roth IRA. That’s called a conversion and has separate rules.

There are other kinds of retirement accounts, too, such as SEP or SIMPLE IRAs You can see a summary of which kinds of rollovers are allowed in this IRS chart.

How to Do a Rollover

A rollover from your 401(k) plan is easy. You pick a place, like a bank, brokerage or online investing platform, to open an IRA. Let your 401(k) plan administrator know where you have opened the account.

Then, you can do a direct rollover. This means that your plan administrator sends the money directly to the IRA you opened at a bank or brokerage. Or, he or she may cut you a check made out to your account, which you deposit. Going directly (no check) is the best approach.

For more on how to report an indirect rollover on your taxes, check this IRS site.

If you choose to roll your 401(k) into an IRA annuity there are two primary types, Immediate and Deferred. With an Immediate Single-Life Annuity, you will receive one check per month for the rest of your life, no matter how long you live. The amount of this monthly check is determined by the size of your account, the interest rates at that time, and your life expectancy. With an immediate annuity you are giving up control of your principal and therefore it is important to understand that you are giving up all of your money in exchange for a series of payments. With a Deferred Annuity, you maintain control of your principal and can receive guaranteed payments while benefiting from potential upside in the stock market. This is accomplished through the purchase of additional riders that will guarantee at a minimum a 5-7% worst-case return on your money, but if the market does better you are guaranteed the higher return and can lock in your new higher principal value to increase your income. If your employer does not offer to annuitize your 401(k), you can take a lump sum payout from your 401(k) and use the funds to purchase an annuity contract — just be sure and do so within 60 days of the 401(k) distribution to avoid any taxes, and be sure the check is made out to the new custodian FBO (for benefit of) you, so that the IRS will not deduct 20%.

Advantages of the 401k Rollover Annuity:

Guaranteed Principal: Principal is guaranteed with a 401k rollover annuity, while the principal is not guaranteed with mutual funds, stocks, or bonds associated with your 401(k) or IRA investment.

Income Protection: With the best annuities with living benefit riders or immediate annuities with life contingencies, you cannot outlive your money. As long as you are alive, the insurance company is obligated to send you a check every month.

Death Benefit Protection: With the top deferred annuities, for an additional fee (usually 0.25% to 0.75% per year), some insurance companies offer what is referred to as “Enhanced Death Benefits.”

Contribution Limits

Once you have established a rollover IRA, you can make contributions to it up to the annual limit. For 2019, the limit is $7,000. If you are doing a different kind of rollover into a different kind of IRA or retirement plan, you can check out contribution limits here.

The Most Important Rule

The most important rule is: Don’t cash out. Unless you are in a real crisis or you meet the criteria for emergency withdrawals, you should keep your money in a tax-deferred account. That can be a 401(k) or an IRA. If you cash out for good, you will pay taxes and penalties. You’ll be robbing your future self of the money you will need to live on in retirement.








All information presented for educational purposes.