In the event that you leave your current employer – whether by choice or not, you will need to gather up some information regarding your 401k rollover options. It is very important to know the options available to your distribution options as well as your retirement options. The choice you make now will directly affect you in the long run. Here are some popular options you may want to consider.
Direct Rollover into an IRA
This is hands down the simplest way to avoid any federal and state withholding taxes that may be coming your way. Rolling over into an IRA will also allow you to dodge a possible 10% penalty. Since an IRA is a tax-deferred account your money will still be allowed to accumulate more rapidly than if you were to place it in a taxable account.
This option will allow you to attain the money in your retirement plan. While this may be the choice for many, here are some things to consider.
- Federal and State taxes will take a pretty big bite out of the distribution.
- There is a 20% mandatory federal income withholding tax that is applied to eligible rollover distributions.
- An extra 10% penalty may also apply.
The basic breakdown would look like this…
If you have $100,000 you can expect to end up with somewhere around $80,000 or less.
Transfer Funds to Your New Employers Plan
An excellent option if your new employer allows this. You will be able to avoid all current taxes, as well as the 20% withholding tax that can take a serious amount out of your retirement plan.
Keep Funds in Your Old Employers Plan
If your account is valued at $5,000 or more, your old employer may allow you to keep the funds in your current account. While your old employer will not contribute to the account, it will continue to grow tax-deferred.
Remember to always allow yourself time to explore all your options should you need to make an important 401k decision. Your future and the future of your family may depend on the decision you make today.