At CrossRoads Financial, we are a family-owned and operated independent financial advisory firm located in Hilton Head Island. Using our process, the Iron Horse 360, we take a holistic approach to financial planning. This means our services are always personalized, and we pride ourselves on handpicking investment opportunities for each unique portfolio. In addition, our firm abides by the fiduciary standard of care, which requires that our actions and decisions are ruled by the client’s best interest. To aid in this, Bill has acquired several certifications: Bill being certified as a CFP and a CPA. Through this process, our firm has built strong, long-term bonds with clients for over two decades. We believe that values matter, which is why we will continue to offer clarity, transparency, and valuable counsel to those who trust us to provide it.
A 401(k) rollover is the transfer of funds from a 401(k) into either an individual retirement account (IRA) or a new 401(k). The Internal Revenue Service (IRS) gives 60 days from the date the funds are removed from the originating plan to complete the transfer into the new account. If you leave a job or any reason where you have a company-sponsored 401(k) plan, you must choose what to do with those funds. There are various options available to you, including completing a 401(k) rollover into a new employer’s plan, bank rollover options, or completing an IRA rollover. An IRA rollover offers retirement savers numerous benefits.
How to Rollover a 401(k)?
The first step towards rolling over your 401(k) is deciding which type of account you’d like to open. Your two main choices are a traditional IRA and a Roth IRA. The two differ based on when you pay taxes on your rolled amount, fees paid during or throughout the rollover, and the availability of withdrawal. To determine which option is right for you here is a small summary of each account type:
When rolling over to a traditional IRA, your contributions are tax deductible. These contributions will remain tax deferred until the time comes for them to be withdrawn. At the point of withdrawal, your contributions will be taxed. Additionally, this withdrawal must take place by age 72 according to required minimum distributions (RDMS), regardless of your employment status. Traditional IRAs are a good choice for those who are currently in a high tax-bracket and might expect to enter a lower one during retirement. That way, you will avoid paying high taxes for your initial contributions, and hopefully encounter lower ones at the time you choose to withdraw.
Rolling over to a Roth IRA means that the amount is immediately considered taxable income. This is a good option for those in a lower to middle tax bracket, who might predict that they will enter a higher one in the future. This is because any earnings will become tax free after five years of remaining with the Roth IRA and being over the age of 59 1/2. And these contributions can stay in your IRA for as long as you’d like. Since there are no lifetime distributions requirements for Roth IRA, you can technically leave the funds in your account indefinitely, giving you the option to leave leftover contributions to heirs.
401(k) Rollover Rules
401(k) rollover rules can vary based on your situation. For example, the type of 401(k) and kind of retirement account you are looking to roll over your 401(k) into will make a difference as to the amount of taxes you may need to pay, fees you may incur, as well as any other consequences. This is why it is essential to get a financial advisor involved in your 401(k) rollover. A financial advisor will know the ins and outs of 401(k) rollover rules and be able to guide you to make the best decision for you and your unique situation and to avoid a potentially unexpected tax burden.
Keep in mind that a traditional 401(k) is funded with pre-tax income. Taxes on these retirement savings funds are due upon qualified withdrawal. A Roth IRA is funded with post-tax money, so you pay taxes upfront. Therefore, these funds will be tax-free upon qualified withdrawal. You can avoid an immediate tax burden by dispersing pre-tax funds into a traditional IRA and post-tax funds into a Roth IRA. Each year, the Internal Revenue Service (IRS) evaluates the maximum contribution limits for 401(k) plans and other retirement savings vehicles. They can make changes to these limits annually as needed. Those retirement savers who have reached age 50 may be eligible to make “catch-up” contributions in addition to the annual limitations set forth.
Additionally, you have the option to remain in the company's 401k plan if allowed or take a distribution in cash. A cash distribution will have tax implications and potentially a penalty tax if under the age of 59 1/2. Choosing the best option and executing it correctly can be an overwhelming process. It requires strategizing according to your current tax bracket, investment opportunities, and financial goals so that your rollover aligns with them in the future. The purpose of retirement planning is to help you relax in your later years, but that doesn’t mean you need to incur any unnecessary stress now. Take the fear out of finances by speaking to us.