Retirement rollovers: A guide to smart moves
Retirement is an exciting chapter of life, but it comes with big decisions—especially about what to do with your retirement accounts when you leave a job or retire.
One of the most critical choices you’ll face is what to do with your 401(k), 403 (b) or other workplace retirement plans. Should you roll them over into an IRA? Move them to a new employer’s plan? Or leave them where they are?
Let's break down your options, their pros and cons, and how to navigate the process wisely.
What is a rollover?
A rollover transfers funds from one eligible retirement account to another, typically preserving the account’s tax-advantaged status.
There are two types of rollovers:
- Direct rollover: Funds move directly from one account to another. This method is easier and avoids unnecessary taxes, making it the preferred choice for most retirees.
- Indirect rollover: You temporarily take possession of the funds and redeposit them into another account within 60 days. While this option is more flexible, it’s riskier and may lead to taxes or penalties if mishandled.
Why consider rolling over your retirement plan?
Rolling over your retirement account can offer several advantages, including:
Simplifying your finances: Consolidating accounts into one IRA makes tracking your savings and managing investments easier.
Expanding your investment options: IRAs often offer more investment choices than workplace plans, giving you greater control.
Saving on fees: Some IRAs charge lower fees than employer-sponsored plans, which can save up to thousands of dollars over time.
Planning for taxes with a Roth conversion: Rolling over to a Roth IRA lets you pay taxes now for tax-free withdrawals in retirement. This can be a good strategy if you expect to be in a higher tax bracket in the future.
Choosing the right rollover option now can help simplify your finances, reduce fees, and maximize your retirement potential.
What are your choices for a rollover?
When deciding what to do with an old 401(k) or similar account, you have four main options:
Do nothing!
Pros: Even if you stop contributing, you can leave your savings in your employer plan, which may offer lower fees than some IRAs.
Cons: You'll have limited investment options and may face restrictions on future contributions.
Roll it into an IRA
Pros: IRAs offer greater investment flexibility and control and make it easy to consolidate multiple accounts. They also allow for Roth conversions.
Cons: Some IRAs charge higher fees, and you won’t have access to loan options like some 401(k) plans provide.
Cash out your account
Pros: Makes it possible to access your retirement savings if you have unexpected or emergency expenses pop up.
Cons: Cashing out a retirement account early will trigger taxes and/or penalties if you're under 59½.
Roll it into your new employer's plan
Pros: Keeps everything in one place and provides access to employer protections.
Cons: Employer plans usually have fewer investment options, and you may have to wait to join the new plan.
How to rollover a retirement account smoothly, step by step
If you've decided a rollover is right for you, follow these steps:
- Choose the right IRA
Consider a traditional IRA if you want to defer taxes or a Roth IRA if you’re ready to pay taxes now for tax-free withdrawals later.
- Set up your new account
Compare fees and investment options before opening an IRA with a reputable provider.
- Opt for a direct rollover
This ensures your funds transfer directly between accounts, avoiding the mandatory 20% withholding tax.
- Watch the 60-day rule
If you do an indirect rollover, deposit the funds into the new account within 60 days to avoid taxes and penalties.
- Consult a financial advisor
Tailored advice can help you align the rollover with your broader financial goals.
Special considerations: Roth conversions and after-tax rollovers
Thinking about a Roth conversion? You’ll pay taxes on the converted amount, but future withdrawals will be tax-free. This is a smart move if you expect your tax rate to rise. If you have nontaxable funds, like after-tax contributions, make sure these are tracked correctly to avoid overpaying taxes when rolling them into an IRA.
Common rollover mistakes to avoid
Avoid these pitfalls to make your rollover as smooth as possible:
Missing the deadline
Failing to complete an indirect rollover within 60 days can trigger taxes and penalties.
Choosing an indirect rollover unnecessarily
Direct rollovers are simpler and safer since the funds never touch your hands.
Not comparing fees and options
While IRAs offer flexibility, some employer plans may have excellent investment options and lower costs.
Envision your future
Managing your retirement accounts doesn't have to be stressful. Choosing the right rollover option now can help simplify your finances, reduce fees, and maximize your retirement potential.
If you’re unsure about your options, don't hesitate to consult with a financial advisor. A little expert guidance can go a long way toward ensuring your hard-earned savings work as hard for you as you did for them.
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This material is for informational or educational purposes only and is not fiduciary investment advice, or a securities, investment strategy, or insurance product recommendation. This material does not consider an individual’s own objectives or circumstances which should be the basis of any investment decision.
Investment products may be subject to market and other risk factors. See the applicable product literature or visit TIAA.org for details.
Retirement check refers to the annuity income received in retirement. Guarantees of fixed monthly payments are only associated with TIAA's fixed annuities.
Investment decisions should be made based on the investor's own objectives and circumstances. Advice is obtained using an advice methodology from an independent third-party.
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