A rollover refers to the process of taking the money out of your 401(k)/403b/457 retirement plan and moving it into a different retirement plan. This typically takes place when you leave your company or retire.
You have the following main options with your 401(k)/403b/457 when you leave an employer:
Cash it out. Cashing it out is usually a mistake. On a traditional retirement 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)/403b/457 with good investment choices and low fees, this could be an option.
Roll it over into your next employer’s retirement plan. 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)/403b/457 plan 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 previous employer plan.
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 retirement plan 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 transfer their investment dollars out of the generally restrictive retirement plans, and into more flexible plans such as Annuities. Rolling your retirement savings 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)/403b 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)/403b 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 allowed by IRS Code.
Advantages of Rollover Annuity:
Guaranteed Principal: The principal is guaranteed with a 401k/403b 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.”
Once you have established a rollover IRA, you can make contributions to it up to the annual limit. For 2021, the limit is $7,000 if you are 50 years old or older.
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)/403b 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.