Have an Old 401(k)? Consider a Rollover IRA for the Funds
The average American will have about 12 jobs during their lifetime,1 which can lead to a collection of workplace retirement plans. While there are several different types of plans offered by employers, the most common is a 401(k). What can former employees do with these plans once they move on from a company? There are several options, including:
Cashing out. Cashing out an old 401(k) before the age of 59 ½ will incur a 10% penalty and additional income taxes. For this reason, a cash out is typically not advised.
Keeping the account. Some companies allow former employees to keep their 401(k)s open with one caveat: They can no longer make contributions to it. Accounts with less than $5,000 in them cannot be kept open. Employers can only hold them for 60 days before the funds must be rolled over.
Rolling over the funds. Accountholders can preserve tax advantages and avoid early withdrawal penalties by rolling the balance of employer-sponsored retirement plans into their new employer’s 401(k) (if applicable). Or they can open an Individual Retirement Account (IRA), which is not tied to employment and therefore gives accountholders more autonomy over their retirement planning. This is known as a rollover IRA.
FAQs about rollover IRAs for 401(k)s
What are the benefits?
As mentioned, a rollover IRA allows accountholders to maintain their tax benefits and avoid penalties – but the benefits don’t end there! Consolidating funds into one account may provide individuals with the big picture they need to gauge their retirement readiness. Plus, the account is solely owned by the individual. The account won’t go anywhere if they change jobs, and they can still make contributions to it.
What are the steps to roll over funds?
Shopping for the right IRA should come first. Factors like cost, customer service, access to a mobile app for account management, and more should help individuals narrow down their choices. After selecting the best IRA, accountholders should ask their former 401(k) administrator about the rollover process, as they will provide any forms that need to be completed. Funds must be rolled over within 60 days to avoid any tax penalties related to early withdrawals.
General Electric Credit Union (GECU) offers the two most popular types of IRAs: Traditional and Roth. In the former, funds are tax deductible or tax deferred – just like 401(k) contributions. Some accountholders may choose this as their rollover option for this reason. On the other hand, Roth IRA contributions are considered post-tax and are therefore not tax deductible or deferred. The benefit of this is that withdrawals made in retirement are tax-free. Consult a financial advisor to confirm the best type of IRA an old 401(k)s’ funds should be rolled over into, as there are some rules involved that may influence an individual’s decision. Once GECU members are ready to open a rollover IRA, they can schedule an in-branch appointment. A dedicated team member will walk them through the process.